AG holds that vehicle hire purchase agreements constitute a single taxable supply

On 3 May 2018, Advocate General (AG) Szpunar released his opinion in the case of Volkswagen Financial Services (UK) Ltd (VWFS UK Ltd), a referral from the UK.

The UK (and Ireland) currently treats hire purchase transactions as two distinct supplies – a taxable supply of goods (motor vehicles) and an exempt supply of credit (finance). The referral originally requested the Court to consider the correct attribution of VAT on overhead costs in relation to such hire purchase transactions.

However, the AG has held that the UK incorrectly splits the supply of a motor vehicle under a hire purchase transaction into a distinct supply of goods and a supply of credit. The AG was clear that, instead, these transactions should be treated as a single VAT taxable supply, with the right to deduct all of the VAT on associated costs.

Implications

The Court of Justice of the EU does not have to follow the AG’s opinion. However, if followed by the Court, the AG’s opinion will result in a significant and fundamental change in the VAT treatment for hire purchase businesses across a range of sectors (for example, automotive, banking, aircraft, oil). Ireland currently adopts a similar VAT treatment to the UK on hire purchase transactions and Irish VAT law will also need to change if the Court upholds the AG’s Opinion. This change in VAT treatment would lead to commercial implications on pricing and contractual issues.

Hire purchase businesses may wish to review their existing HP contracts to understand the impact a change of law would have on them.  Hire purchase businesses may also consider submitting protective claims now in the event that the Court follows the AG’s opinion. Before submitting a protective claim, you should note the AG made it clear that hire purchase businesses cannot ‘have their cake and eat it’. If a business decides to leave the historic supply of finance as a separate exempt supply, input VAT cannot be reclaimed in full. Conversely, businesses may choose to make a retrospective claim and account for the additional output tax on the entire hire purchase transaction with the right to deduct the VAT in full.

Prospectively, if the Court follows the AG’s opinion, affected businesses will also need to review existing partial exemption methods and any existing VAT assessments/claims. If you would like to discuss the potential impact of this case, please feel free to get in touch with me or your usual EY contact.