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November 3, 2009updated 12 Apr 2017 11:57am

Andy Thompson: Final chapter approaches in VAT saga

Many motor lessors and dealers may soon know whether they can recover very substantial sums in VAT reclaims. These arise in connection with manufacturers' volume bonuses.

By Andy Thompson

Many motor lessors and dealers may soon know whether they can recover very substantial sums in VAT reclaims. These arise in connection with manufacturers’ volume bonuses.

The problem with bonuses first came to light back in 1996 with a landmark ruling by the European Court of Justice (ECJ) in the Elida Gibbs case. Prior to that, volume bonuses had been treated under UK VAT as distinct supplies of services to the manufacturers by the relevant dealers or lessors. Elida Gibbs meant that they should have been treated as discounts from the net car prices charged by the manufacturers.

This made a real difference in cases where VAT cannot be reclaimed by the bonus recipients, which has always been the case for dealers’ demonstrator cars. For leasing fleets VAT was non-recoverable up to 1995, and for daily rental operations it was so until 1992.

The reclaims are all for periods before 1997 when the VAT treatment of bonuses was changed following Elida Gibbs. In some cases they can go back to the introduction of VAT in 1973.

“The motor industry may be helped by the outcome of a separate case fought by Marks & Spencer. That concerned chocolate Jaffa cakes, which for some years had been wrongly classified as taxable confectionery rather than zero-rated food”

After the leading case, the UK authorities enacted new time limits to try to stop back claims running over more than three years. However, in January 2008 the House of Lords held, in the light of related ECJ rulings, that these retrospective time limits contravened European law.

Taxpayers were then given until 1 March this year to put in any reclaims arising from Elida Gibbs.

It is still possible HM Revenue & Customs may try to resist the claims by invoking a separate UK VAT law concerning ‘unjust enrichment’ (UE), that is designed to stop VAT reclaims where the taxpayers could not be expected to identify and refund customers who would have ultimately borne the burden of overpaid VAT.

Here the motor industry may be helped by the outcome of a separate case fought by Marks & Spencer (M&S).

That concerned chocolate Jaffa cakes, which for some years had been wrongly classified as taxable confectionery rather than zero-rated food.

The ECJ, to whom the House of Lords had referred the M&S case, found in favour of M&S on the key issues in European VAT law last April. This month the Law Lords formally resolved the case in M&S’s favour, since HMRC had found no further grounds to contest it.

In the M&S case the UK’s UE restriction was found to breach European laws on “fiscal neutrality”, as the UE law applies only to “payment traders” (for example, those making net periodic payments of VAT), and not to “repayment traders” who receive net payments for recoverable input VAT.

M&S is a payment trader, but the point was that it has to compete directly against other retailers whose sales consist mostly of zero-rated foods and are therefore repayment traders.

Some experts believe that the motor industry case is comparable to that of M&S. For lessors, though normally payment traders, can occasionally be repayment traders in particular periods such as when renewing their fleets.

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