Upper Tribunal
Source gov.uk
Source EY
Volkswagen Financial Services (UK) Limited v HMRC
The Upper Tribunal (UT) has released its decision in this case asking whether the second-hand margin scheme (margin scheme) applies to the sale of vehicles made by a finance company following the recovery of the vehicles upon termination of finance agreements.
Volkswagen Financial Services (UK) Limited (VWFS) provides finance to members of the public for the purchase of motor vehicles under hire purchase agreements and personal contract plan agreements. VAT is accounted for on the basis that VWFS makes supplies of goods to its customers in return for the full capital amount due. The VAT initially accounted for is subject to subsequent adjustment where there is an early termination of the agreement.
VWFS’ appeal is against a decision by HMRC to reject its claims for a refund of over £24 million of output tax which it considered it had overpaid on the resale of vehicles to third parties (typically at auction) which were either voluntarily returned to it or repossessed on the early termination of the finance agreements (resales). VWFS had accounted for VAT on the full sales price received on these resales. HMRC considered this to be the correct position, however VWFS asserted that a refund was due on the basis that VAT should be due by reference to VWFS’ profit margin under the margin scheme for dealers in second-hand goods.
In the event of the resales being subject to the margin scheme, VWFS argued that its operation was such that VAT would not be due on them. This was on the basis that its profit margin, on which it is to be taxed under the scheme, is confined to the difference between the amount which the customer has paid under the finance agreement (being, in its view, the subjective value of the consideration provided by VWFS for the supply by the customer) and the price received on the sale at auction. Usually this produces a zero or a negative amount so that no VAT is in fact due.
HMRC argued that if the margin scheme were to apply as VWFS argued, there would be under taxation. HMRC asserted that there is no embedded VAT cost as a result of the finance agreements of a kind which needs to be relieved in effect by exempting from VAT all (or substantially all) of the sales proceeds received on the resales. The vehicles are not reintroduced into the commercial supply chain when they are handed back or repossessed by VWFS; there is no supply by the customer for consideration in those circumstances which engages the margin scheme. The VAT charged on the supplies is confined to the actual consideration received by VWFS. To charge VAT on the subsequent sales proceeds gives an entirely proportionate result in line with the fundamental principle that VAT is to be charged on the full consideration received for each separate supply. If VWFS’ approach was to be adopted, it would essentially obtain full tax recovery on the cost component incurred in making these supplies (the purchase price of the vehicle) but would account for VAT only on the initial supplies under the finance agreements (as adjusted to take into account the reduction in consideration on termination and bad debt relief) and not on the resales.
The First-tier Tribunal (FTT) dismissed VWFS’ appeal, holding that the margin scheme does not apply to the resales of the vehicles on the basis that the customer does not make a supply of goods to VWFS when VWFS recovers possession of the vehicles on termination of transactions under finance agreements.
The FTT also considered, and dismissed, a separate assertion that if the margin scheme was considered not to apply, VAT would not be due on the resales under article 4(1)(a) of the Cars Order (the de-supply provision) which provides that a disposal of a “used motor car by a person who repossessed it under the terms of a finance agreement, where the motor car is in the same condition as it was in when it was repossessed is neither a supply of goods nor services”.
This latest appeal only pursues VWFS’s contention that the relevant supplies should be taxed by reference to the margin scheme.
Dismissing this latest appeal, the UT noted that in order for the resales to be taxed under the margin scheme, there would need to be a supply by the customer to VWFS of the vehicle. In order for there to be a ‘supply’ there must be a supply of goods by the customer for consideration when the vehicle is repossessed.
The UT considered that a customer under a finance agreement never acquires the right to dispose of the vehicle as owner unless and until they exercise the option to purchase. Therefore, wherever a finance agreement is terminated prematurely the customer has never acquired the right to dispose of the vehicle as owner in the first place. If they never obtain the right to dispose of the vehicle as owner, they cannot transfer that right to VWFS. The UT rejected VWFS’s contention that the actual handing over of goods at the commencement of a finance agreement is to be regarded as the transfer of the right to dispose of tangible property and that once that ‘fiscal fiction’ is established, its consequence must be followed through to its natural conclusion, which is that when the customer returns the vehicle to VWFS they are to be regarded as transferring back the right to dispose of the vehicle as owner.
The UT also dismissed VWFS’s contention that the return of the vehicle should be construed as a supply for the purposes of the margin scheme on the proposition that there is otherwise irrecoverable VAT (and thus double-taxation if VAT is charged on the re-sale of the vehicle in the second-hand market). It submitted that double taxation arises wherever there is a second charge to VAT on the value of goods in respect of which the VAT by any previous owner remains unrelieved, as is inevitably the case here, to the extent of the payments made by the customer under the finance agreement. The UT suggested that if there were an element of embedded irrecoverable VAT in the vehicle at the point it is repossessed, that would be insufficient reason to apply what it considered would be a strained construction to the VAT Directive.
Appeal dismissed, the margin scheme does not apply to the sale of vehicles made by a financier following the recovery of possession of the vehicles on the termination of hire purchase transactions.
Comment: Given the amount at stake an application for further litigation is possible. Businesses in a similar position should consider the decision and its implications on current VAT accounting.
