The threat of increased VAT impositions on HP and conditional sale
contracts (including PCP deals) has been causing concern to the
credit industry on two levels.
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The most immediate concern involves moves by HM Revenue &
Customs (HMRC) to prevent finance companies from recovering VAT
paid on overhead costs attributable to these deals. Under existing
law it has always been clear that finance companies have to account
for VAT on the resale cost of the car to the customer, and can
therefore recover the VAT they have paid in the same amount on
their purchase from the dealer or manufacturer. It is equally clear
that the balance of the receivables due from the customer,
comprising the finance charges, is VAT-exempt as a credit service.
HP/conditional sale is therefore a “partially exempt”
transaction.
The contentious area concerns VAT incurred by the finance
company on general overheads. To date, each finance house has been
able to recover a proportion of its input VAT from overheads, which
is treated as attributable to the taxable “same state supply” of
the vehicle, as opposed to the VAT-exempt credit service. These
proportions have to some extent varied from one company to another,
in the light of information provided to local VAT officers, and
consequential negotiations with them, on exactly how the overhead
costs can be attributed.
Earlier this year HMRC stated its view that there should be no VAT
recovery at all in respect of overheads, since they should all be
attributed to the credit supply. This was all the more surprising,
since it had lost a case fought against Royal Bank of Scotland
(RBS) concerning these recoveries in the VAT Tribunal (see Motor
Finance April ’07).
For the time being, it seems that finance companies’ recovery
arrangements are generally being left in place whenever they come
up for regular review by local VAT officers. It seem certain that
the longer term outcome for all finance houses will be affected by
the upshot of the appeal on the RBS case, which is due to be heard
in the Scottish Court of Session early next year, although it may
involve some features peculiar to that company.
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By GlobalDataThe most encouraging news is that HMRC has now entered into a
dialogue on this subject with the FLA, which is seeking to
establish some relevant benchmarks for HP business models. It is
hoped to conclude discussions between the two sides during the
first half of 2008.
In the meantime there has been some concern that changes at
European level could result in a much greater increase in the VAT
burden, through the HP credit charge itself being made a taxable
item. This arose from the wording of a European Commission proposal
for a new VAT Directive affecting insurance and financial
services.
However, the Commission has now assured the FLA that it had
no intention to impose VAT on HP type credit charges, although its
proposals might have inadvertently given that impression. The
latest text of the proposal, issued on November 28, is currently
being scrutinised by practitioners to see whether the apparent
threat has receded. An actual draft Directive on this subject in
full legislative form is still some way away, but the Commission’s
assurances at this stage seems helpful.
