Historically, VAT recovery in the hire purchase sector was of interest only to practitioners in the asset finance industry. It was fairly anodyne. Then HMRC changed its approach, and it became the arena for a bitter battle over the most contentious pillar of HMRC’s policy on VAT recovery – the ‘incorporation in price’ argument. It came to a head in the Volkswagen Financial Services (UK) Ltd (VWFS) litigation. Here, the Court of Appeal found no authority to justify HMRC’s contention that the inclusion of the costs of an input transaction in the price of a taxable output transaction was a pre-condition to the recovery of the input tax. The judgment has implications beyond HP businesses, including for VAT recovery by holding companies.
