The First-tier Tribunal's decision in Volkswagen Financial Services (UK) Limited (VWFS) [2011] UKFTT 556 (TC) considered whether a partial exemption special method ‘fairly and reasonably’ attributes input tax incurred on overheads to the taxpayer's taxable activities. In that case, VWFS’ business involved the taxable sale of motor cars at cost and the VAT-exempt supply of finance (the HP credit). HMRC argued that as the taxable supply was at cost, the overheads could only be attributable to the exempt supply. The Tribunal ruled that HMRC’s policy is fundamentally flawed and allowed VWFS's appeal. Any method that has the effect of treating the overhead costs as solely cost components of a particular element, or elements of the transaction, to the exclusion of another element, or other elements, cannot be fair and reasonable.
