Tax alert 32 – Deduction of input VAT related to mixed use acquisitions in case of hire purchase agreements

In this issue:

  • Deduction of input VAT related to acquisitions of goods and services used for both taxable and VAT exempt without deduction right operations, performed in relation with contracts for the hire purchase of motor vehicles

CJEU Decision in the case C- 153 /17 Volkswagen Financial Services (UK) Ltd

On 18 October 2018, the Court of Justice of the European Union (“CJEU”) issued its judgment in the case Volkswagen Financial Services (UK) Ltd. This decision is relevant for taxable persons who perform economic activities consisting in the rental / leasing of motor vehicles, where there is in place a hire purchase agreement of motor vehicles.

The decision brings into discussion the conditions for exercising the input VAT deduction related to expenses with goods and services used for both taxable and VAT exempt operations, in relation with contracts for the hire purchase of motor vehicles, as well as the VAT treatment applicable to this type of contracts.

Facts of the case and Court Decision

Volkswagen Financial Services (UK) Ltd („VWFS”), a financial company established in the UK concluded hire purchase agreements whereby it acquired motor vehicles from dealers and further on supplied them to its customers, the ownership over the vehicles passing on to the customers at the time when all the payments due under the agreement were made.

The payment made by the customer under a hire purchase contract was divided into two elements: the vehicle price, equal to the price paid by VWFS to the dealer and the interest, which was computed by taking into account overheads, the costs of financing the vehicle, an allowance for bad debts and a profit margin.

Based on the UK VAT law, VWFS was seen as performing taxable supplies of vehicles and VAT exempt supplies of credit (corresponding to the interest charged to its customers).

In this context, the Supreme Court of the UK referred questions to the CJEU as regards the deduction of VAT related to overhead costs, where such costs were incorporated only in the interest payable by the customers, as well as with respect to the possibility of disregarding the taxable supplies of cars for the purpose of applying the special VAT pro rata.

The CJEU observed that deferred payment of the purchase price of goods, in return for payment of interest, may be regarded as a grant of credit, provided that the payment of interest does not constitute part of the consideration obtained for the supply of goods / services, but consideration for the grant of credit, which is for the national court to determine.

As regards the allocation of the general costs, the CJEU was of the view that such costs have a direct and immediate link with the activities of VWFS as a whole, irrespective of the fact that the costs were included only in the price of the VAT exempt transactions. Consequently, the input VAT related to general costs could be deducted to the extent the costs are attributable to taxable operations.

Thus, in respect of the transactions concerned, the CJEU concluded that a special method for determining the VAT pro rata which does not take into account the value of the vehicles, but only the interest, does not ensure a more precise allocation of overhead costs to exempt / table supplies than the general, turnover-based method.

What is new about the CJEU decision in the Volkswagen Financial Services (UK) Ltd case?

The decision seems to raise additional questions when looking at previous EU case-law, particularly with respect to:

  • The VAT treatment applicable to financial leasing, supplies of goods under deferred payment terms, other rental / lease agreements where there is an option for the customer to buy the good at the end of the related agreement

Previous EU case-law, namely the decision in case C-208/15 Stock ’94, concludes that the supply of goods and the granting of a loan for the purchase of those goods represent a single operation in which the delivery of the goods is the principal supply. Under this approach, both the value of the goods and the related interest would be subject to TVA.

  • The method for determining the VAT pro rata to be used for the deduction of input VAT related to mixed-use acquisitions, in the context of the transactions mentioned above

According to the decision of the CJEU in the Midland Bank case, where financial lease operations were analyzed, the VAT pro rata computed on the basis of the actual use of the goods and services, taking into account only the part of the rental payments which corresponds to the interest (seen as the effective remuneration received by the supplier for the financing and management of the leasing agreements) could lead to a more accurate result than the turnover-based pro rata.

However, based on the decision of the CJEU in the VWFS case, the decision in the Midland Bank case does not establish a general rule for the computation of the VAT pro rata in case of all leasing operations which are similar to the one analyzed in the respective case.

Impact of the decision

Given the discussed decision, companies performing transactions under conditions which are similar to the ones in the case at hand should analyse their current business models and assess whether the VAT treatment applied is correct and , if the case, whether they should revisit the method used for VAT pro rata computation.

When performing such an analysis, companies should also keep in mind the current provisions of the Romanian VAT law as regards financial lease operations and supplies of goods under deferred payment terms.


Author: Catalina Cambei – Manager, Indirect Tax


For additional information, please contact:

Alex Milcev, Partner – Head of Tax & Legal


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