HMRC have issued new guidance for businesses who supply goods by way of hire purchase agreement, specifically relating to the deduction of input VAT related to such supplies.

The change in legislation stems from a case heard by the Court of Justice of the European Union (CJEU) where the Appellant, Volkswagen Financial Services (UK) Limited, was deemed to make a mixed supply in relation to hire purchase agreements for vehicles. It was established that these agreements consisted of an exempt supply of credit and taxable supply of goods and as such, input VAT recovery in relation to the provision of these agreements will be restricted.

HMRC’s position, with respect to agreements of this nature, is that there is no one-size-fits-all approach to calculating input VAT available for recovery and the proportion allowable will vary depending on the specific agreement in place. The CJEU ruled that an output values-based apportionment calculation should be applied and should include the value of the asset to which the hire purchase agreement relates. As such, HMRC have advised that the default calculation should be;

(value of the asset + taxable additional charges / value of the asset + value of credit granted) x 100

This figure would then be applied to the residual input VAT to determine the extent to which input VAT is recovery in relation to the agreement. Whilst the method outlined above is HMRC’s preferred method, any approach that can be deemed fair and reasonable will be allowable.

If you or your client make partially exempt supplies, including of the nature described above and require assistance in performing apportionment calculations, please call our free VAT helpline today.

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