A motor dealer has won at least the first round in a significant
VAT case involving commission receipts from finance companies. On
May 21 the London VAT Tribunal released its ruling in favour of
Camden Motors (Holdings) Ltd, representing Vauxhall, Ford and
Renault/ Nissan dealerships within its corporate group.
Dealers recover in full the VAT paid on cars purchased for
trading stock, since they must charge VAT on the onward car sales.
Potentially, however, they are in a “partial exemption” (PE) system
in relation to VAT paid on their general business overheads – i.e.
costs of office accommodation, IT equipment, advertising, staff
travel etc. They may not be able to recover all of that VAT, since
a portion of it may be attributable to generating VAT-exempt
receipts from finance and insurance (F&I) commissions rather
than taxable car sales.
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The relevant law is in the VAT Regulations 2005. Camden had been
applying a standard PE method under Regulation 101(2)(d). This
resulted in full recovery of overheads VAT. The proportion
attributable to F&I, pro rata to the relative “values” of
taxable and exempt receipts, came to less than 1 per cent, in which
case the regulations allow the recoverable proportion to be rounded
up from 99+ to 100 per cent.
However, HM Revenue & Customs (HMRC) sought to override the
standard PE method, using anti-avoidance rules enacted in 2002
(Regulation 107B as amended). HMRC tried to substitute a special PE
method of its own invention, focusing on the attribution of the
taxpayer’s “uses” of the inputs, rather than values of
receipts.
HMRC based its proposed special method on the fact that F&I
income was evidently more profitable than car retailing. On this
basis it claimed that the irrecoverable portion of overheads VAT
attributed to F&I should be as high as 15 per cent, rather than
below one per cent. It claimed some £450,000 per year from Camden
back to 2004, representing the difference in outcome between the
two methods.
There were two legal points in contention. The tribunal found
for Camden on both, though it only needed success on either one to
win its case.
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By GlobalDataOne argument resulted from some ambiguity in the interaction of
various parts of the statute. Regulation 106 (1) refers to a
situation where a relevant amount falls below a defined “de
minimis” limit after an adjustment to a special PE method under
Regulation 107B. Both sides agreed that the resulting amount in
Camden’s case was below the limit, but HMRC had argued that this
did not make the adjustment inapplicable.
The Tribunal recognised that its finding for Camden on this
technical point could be arguable on further appeal. It therefore
set out its full judgment on the substantive argument about the
attribution of overheads, which will be of much more interest to
the industry. Crucially, it found that HMRC’s attempt to introduce
arguments about the relative profitability of F&I was “contrary
to basic principles of VAT [as] a tax on turnover, not on
profit.”
It is not yet clear whether HMRC will take this case
to the next possible appeal stage.
Motor Finance Issue: 44 – June 08
Published for the web: June 26 08 16:1
Last Updated: June 26 08 16:2
