This brief explains HMRC’s suggested method for apportionment of VAT incurred on overheads following the legal judgment C-153/17 Volkswagen Financial Services (UK) Ltd for businesses who supply goods by way of hire purchase agreements.
This emphasises the importance of distinguishing between the value of the credit granted (which is the capital that is lent), and the consideration for the credit, (which is the interest charged and any other fees). The value of the asset for the purpose of this overhead recovery calculation is not the actual selling price, but the capital amount that is financed. (KPMG)
Source gov.uk
For further details on ECJ case C-153/17:
Case C-511/10 Baumarkt indicates that an apportionment calculation should only use an allocation other than output values if it provides for a more precise determination of the deductible proportion. It has not been possible to identify any alternative allocation method which achieves this.
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