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Revenue and Customs Brief 8 (2020) Change to partial exemption VAT treatment


HM Revenue and Customs -Tax Authorities

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Published 10 June 2020

The Purpose of this brief

This brief advises businesses who supply goods by way of hire purchase agreements of HMRC’s suggested method for apportionment of VAT incurred on overheads following the Court of Justice of the European Union (CJEU) judgment C-153/17 Volkswagen Financial Services (UK) Ltd (VWFS).

Who should read this brief

Businesses who supply goods by way of hire purchase agreements.


VWFS, a finance house, provided credit to customers who wanted to purchase a vehicle. It operated by purchasing the car from the dealer at the same time as providing the car with finance to the customer, making all its profit from the exempt supply of credit.

There was no disagreement that VWFS made a mixed supply, but what was disputed was the extent to which the VAT incurred on VWFS’s overheads could be recovered.

The Supreme Court referred the case to the CJEU. The CJEU held that:

  • VWFS’s overhead costs were a component of the overall supply of goods - by way of a hire purchase agreement
  • there is a right to recovery even when the overheads are only set against the exempt element for costing purposes
  • a member state cannot exclude the value of the goods in a values-based apportionment method, as that method would be less accurate than the standard method

HMRC position

HMRC’s view is that a business supplying goods on hire purchase should be allowed input tax recovery on its overheads where the recovery is fair and reasonable. It does not follow that the recovery will simply be fifty-fifty.

Where a business can evidence the use of its overheads in transferring the asset as well as making the supply of credit there is an entitlement to recover a proportion of the VAT incurred on overheads. There is no fixed rate which can apply to this, as HMRC recognises that this proportion will vary according to the type of hire purchase agreement being provided and the specific arrangements in place.

The CJEU has ruled that an output values-based apportionment calculation cannot ignore the value of the asset if there is more than negligible use of the input tax in making that taxable supply. Case C-511/10 Baumarkt indicates that an apportionment calculation should only use an allocation other than output values if it provides for a more precise determination of the deductible proportion. It has not been possible to identify any alternative allocation method which achieves this.

An output values-based method of apportionment therefore needs to be applied which includes the value of the asset in order to reach a proper apportionment of the residual input tax. HMRC’s position is that the calculation should be as set out as:

Value of the asset plus any taxable additional charges or fees received, multiplied by 100, divided by value of the asset plus value of the credit granted - that is the value of the asset, plus consideration for the credit as per the credit agreement and any additional charges, related commission or other fees received.


This worked example is for illustrative purposes only.The actual percentage arrived at will depend on the business’s actual figures.

  1. The value of asset is £10,000 and the value of credit provided is £8,000 at 5% interest over 5 years plus additional charges of £100 (for example an exempt arrangement fee).

  2. The value is reduced to credit amount = £8,000.

  3. Charge for finance (interest amount) is = £1,033.79.

  4. Additional charges (exempt arrangement) = £100.

That is, £8,000 divided by (£8,000+£8,000+£1,033.79+£100) multiplied by 100 = £8,000 divided by £17,133.79 multiplied by £100 = 46.69%.

This approach, of including the value of the credit granted, is consistent with the approach of the CJEU in case C-183/13 Banco Mais where the Court noted the distortion caused by including the full value of the asset but only the charge for the credit.

In that case the answer was to remove the value of the asset in order to make the transactions comparable, however the CJEU has made it clear that this is not the correct approach for a hire purchase agreement transaction. Adding in the value of the credit granted is an alternative means of eliminating this distortion.

Action to take

Email HMRC at where you have:

  • recovered no overhead VAT on hire purchase supplies
  • submitted error correction claims for overhead VAT on hire purchase supplies
  • requested revisions to their partial exemption methods
  • submitted proposals for a new partial exemption method

Next steps

This partial exemption method will be the preferred method for the industry. However, it will not be compulsory, and businesses can continue to apply any fair and reasonable partial exemption method already agreed with HMRC.

About the Author

© Crown Copyright 2020.

A licence is needed to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs.

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Article Published/Sorted/Amended on Scopulus 2020-06-10 17:05:08 in Tax Articles

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