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Case alert August 2015 VW Financial Services (UK) Ltd (VWFS) v HMRC The unanimous verdict of the Court of Appeal in this case is a major victory for VWFS and a major blow to HMRC. Court of Appeal The Court of Appeal has issued its long-awaited judgment in the above case and has allowed the taxpayer’s appeal on both grounds. On the first ground, the issue at stake was whether ‘residual’ input tax (VAT incurred on general overheads) could be reclaimed by VWFS. In cases where a customer of a VW dealership wished to purchase a vehicle on HP, the dealer would sell the car to VWFS which, in turn, would then sell the vehicle to the customer along with the appropriate exempt supply of finance. VWFS made no margin on the sale of the car, its profits were made almost entirely from the exempt supply of finance. HMRC argued that, on that basis, none of the general overheads of the business were used in making the taxable supply of the car. Instead, according to HMRC, the overheads were more accurately to be regarded as being used to make the exempt supplies of finance. As such, none of the residual input tax could be reclaimed. The First-Tier Tribunal (FTT) disagreed with that view and allowed VWFS’s appeal considering that VWFS clearly made both taxable and exempt supplies. On the second ground, VWFS claimed that it was entitled to recover 50% of the residual input VAT (on the basis that for each transaction there were two supplies). In the circumstances, the Court of Appeal agreed that such an apportionment disclosed no error of law on the part of the FTT and accordingly, the appeal was allowed. HMRC may seek leave to appeal this judgment to the Supreme Court. Businesses which provide financial services in a similar manner to VWFS should ensure they maximise the recovery of VAT incurred on overhead costs. If you would like further information please contact: Aidan Lyons Associate Director, VAT T + 44 (0)28 9587 1112 E [email protected] 10th Floor Clarence West Building, 2 Clarence Street West, Belfast, BT2 7GP @GrantThorntonNI www.grantthornton.ie Offices also in Dublin, Cork, Galway, Kildare, Limerick and Longford. That decision was overturned by the Upper Tribunal and VWFS appealed to the Court of Appeal. In a unanimous judgment, the Court of Appeal has restored the FTT’s decision. The Court has held that there is no principled basis for HMRC’s argument that the general overheads of VWFS’s business should not be treated as cost components of both the taxable supplies of cars and the exempt supplies finance. As a consequence, the residual input tax was eligible to be reclaimed. © 2016 Grant Thornton (NI) LLP. All rights reserved.“Grant Thornton” refers to the brand under which the Grant Thornton member firms provide assurance, tax and advisory services to their clients and/or refers to one or more member firms, as the context requires. Grant Thornton NI LLP is a member firm of Grant Thornton International Ltd (GTIL). GTIL and the member firms are not a worldwide partnership. GTIL and each member firm is a separate legal entity. Services are delivered by the member firms. GTIL and its member firms are not agents of, and do not obligate, one another and are not liable for one another’s acts or omissions. Please visit www.grantthornton.ie for further details.