VAT partial exemption and hire purchase agreements

In June 2020 HMRC published Revenue & Customs Brief 8 (2020): change to partial exemption VAT treatment. This affects businesses who supply goods by way of hire purchase agreements.

This is a freeview 'At a glance' guide to VAT partial exemption and hire purchase agreements.

The basic rule for VAT is that input tax which is directly attributable to exempt supplies is irrecoverable unless you are a Partially Exempt business and you satisfy specific 'de minimis' rules.

The new brief explained HMRC’s suggested method for apportionment of VAT incurred on overheads following the legal judgment C-153/17 Volkswagen Financial Services (UK) Ltd (VWFS).  The brief was later incorporated into VAT Notice 706.

VWFS, a finance house, provided credit to customers who wanted to purchase a vehicle. It operated by purchasing the car from the dealer at the same time as providing the car with finance to the customer, making all its profit from the exempt supply of credit. The question was how much VAT could be recovered on overheads.

The Court of Justice of the European Union (CJEU) held that:

• VWFS’s overhead costs were a component of the overall supply of goods, by way of a hire purchase agreement.
• There is a right to recovery even when the overheads are only set against the exempt element for costing purposes.
• A member state cannot exclude the value of the goods in a values-based apportionment method, as that method would be less accurate than the standard method.

HMRC’s view is that a business supplying goods on hire purchase should be allowed input tax recovery on its overheads where the recovery is fair and reasonable. It does not follow that the recovery will simply be fifty-fifty.

The recovery rate will vary according to the type of hire purchase agreement being provided and the specific arrangements in place.

In August 2020 HMRC updated the guidance and specifically the calculation under the heading 'HMRC position' to confirm that where the amount of credit is less than the total value of the asset, then both the amount shown as the value of the asset and the value of the exempt credit will be reduced accordingly.

Useful guides on this topic

VAT & Partial Exemption
How do you calculate the amount of input tax you can recover under the VAT partial exemption rules? What are the de minimis rules?

VAT Toolkit
This is our summary version of HMRC's output and input VAT toolkits, our version includes more detail, topics and planning points.

External links

R & C Brief 8 (2020): change to partial exemption VAT treatment (now incorporated into Partial exemption (VAT Notice 706)