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HMRC v Volkswagen Financial Services

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In HMRC v Volkswagen Financial Services (Case C-153/17) (18 October 2018), the CJEU found that interest charged under hire purchase agreements, related (in part) to taxable transactions.

Volkswagen Financial Services (‘VFS’) provides finance options to purchasers of Volkswagen vehicles. Under a hire purchase agreement, VFS purchases the vehicle from the dealer and supplies it to the customer, so that the ownership of the vehicle does not pass to the customer until all payments have been made. Under UK law, VFS is therefore the supplier of the vehicle and is responsible for its quality and for dealing with complaints. 

The price paid by customers to VFS for the purchase of vehicles is equal to the price paid by VFS to the dealership. However, the interest rate relating to the ‘finance’ aspect of the transaction includes a margin for overheads and profit as well as an allowance for bad debts. Interest charged is therefore included in VFS’s turnover. VFS had agreed a partial exemption method with HMRC to take into account the fact that it makes both exempt and taxable supplies. The issue was the extent to which residual VAT must be regarded, as ‘used or to be used’ by VFS to make taxable supplies. This, in turn depended on whether the interest charged could be considered as a component of the price of the vehicle.

The court observed that the general costs had a direct and immediate link with the activities of VFS as a whole, and not merely with some of them, so that the fact that VFS included those costs not in the price of the taxable transactions (the supplies of vehicles), but solely in the price of the exempt transactions (the supplies of finance) did not change the position. VFS was therefore entitled to deduct VAT in relation to a proportion of the interest. The court added that Member States may not apply a special method of apportionment that does not take into account the initial value of the goods supplied.

Read the decision.

Why it matters: The CJEU focused on substance rather than form when finding that a proportion of the interest charged under hire purchase agreements was charged in relation to taxable supplies.

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