VAT Tribunal Rules on Overheads Tax Ratio

In a judgment which could have implications for other finance companies, Volkswagen Financial Services (VWFS) has won a case regarding the VAT incurred on its overheads.

VWFS makes both VAT exempt supplies (finance) and taxable supplies (vehicles) and had argued that it should be entitled to reclaim VAT incurred on its overheads evenly on a 50/50 ratio.

HMRC challenged this view, saying that such a ratio was neither fair nor reasonable as the main function of the company was to supply finance so apportionment should reflect this particular activity.

The First Tier Tax Tribunal has now found in favour of VWFS, entitling it to reclaim £500,000 of VAT.

The tribunal ruled that VWFS, when entering into an HP transaction, made two supplies, one which was taxable and one which was exempt. As a consequence, if the method of calculation takes little or no account of the taxable supply, the method is inherently unfair and unreasonable.

Lorraine Parkin, head of indirect tax at Grant Thornton said: ‘This is a good result for VW and also the finance sector. Allowing VWFS's appeal, the tribunal judgment opens the door for other finance companies to make retrospective claims for VAT which they previously have not explored. Finance companies may also consider renegotiating their partial exemption methods to incorporate the tribunal's findings.’