VAT recovery - what is an acceptable partial exemption method for a Financial Services company selling assets under HP agreements?
It is apposite that, at the time VW is front page news, another of its brands has been under the VAT spotlight.
HP sales are something of a VAT oddity in that they involve two simultaneous supplies - one of an asset and also credit.
Under a HP agreement the finance co purchases and makes the onward supply of the asset to the final consumer - as opposed to simply supplying credit to a consumer.
Because the standard partial exemption method is based on output values, the significant value of HP financed assets creates an unbalanced VAT recovery position for what is essentially an exempt finance company.
HMRC have never been happy with this and have sought to restrict recovery - at first by dint of an industry wide agreement and more recently via partial exemption special method (PESM) approvals.
In the instant case HMRC sought to argue that, because VWFS took no mark up on the vehicle sale, the business overheads had no 'direct and immediate link' to the taxable supply of the vehicle.
Essentially, HMRC were saying that VWFS shouldn't enjoy any input tax recovery on overheads.
The Court of Appeal ruled otherwise and as such it s back to the drawing board for HMRC.
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