Judgment of 18 October 2018 in case C-153/17 (Volkswagen Financial Services (UK) Ltd) regarding the deduction of input VAT on mixed supplies and hire-purchase agreements.
Volkswagen Financial Services (UK) Ltd (‘VWFS’) is a UK company and part of the German group Volkswagen AG. Its activities include, inter alia, hire purchase transactions whereby vehicles are supplied to individuals.
VWFS offers various types of contract which may result in the acquisition of ownership of the vehicle by the customer, or simply allow the customer to use the vehicle for a given period. For the purposes of those hire purchase transactions, VWFS purchases vehicles from dealerships and then supplies those vehicles, in its own name, to customers to whom it also provides certain related services. The consideration paid by the customer under a hire purchase agreement is divided into two parts: the price of the vehicle, which is equal to the price paid by VWFS to the dealership, and the ‘finance charges’, which include all the other fees and provisions as well as a profit margin.
For VAT purposes, those hire purchase agreements are treated as two distinct transactions: a taxable supply of goods and an exempt supply of credit. For the supply of goods, only the price of the vehicle, as paid by VWFS and charged to the customer, is regarded as consideration. That price therefore includes VAT, the amount of which is equal to the input VAT paid by VWFS on the purchase of the vehicle. The remainder of the amount charged to the customer does not include VAT.
The input VAT paid by VWFS on the purchase of the vehicles is fully deducted from the output VAT charged to customers.
The dispute between VWFS and the tax authority concerns the right to deduct the input VAT on VWFS’ various overhead costs in so far as the goods and services in respect of which those costs were incurred have been used for the purposes of VWFS’ taxable transactions, namely, supplies of vehicles.
The ECJ rules as follows:
- Even where the general costs relating to supplies of moveable goods by hire purchase are passed on in the amount of the interest due in respect of the ‘finance’ part of the transaction, that is to say the exempt part thereof, those general costs must nonetheless be considered to be a component of the price of that supply.
- Member States may not apply a method of apportionment which does not take account of the initial value of the goods concerned when they are supplied, since that method is not capable of ensuring a more precise apportionment than that which would arise from the application of the turnover-based allocation key.