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CJEU hire purchase case

Surprise AG opinion in Volkswagen Financial Services (UK) Ltd vehicle hire purchase agreement case

carolineheath 4 May 2018 No comments

The Advocate General’s (AG) opinion in the Volkswagen Financial Services (UK) Ltd (VWFS) Court of Justice of the European Union (CJEU) case was released on 3 May 2018. In a surprise move the AG has held that in his opinion the current UK VAT treatment of vehicle hire purchase agreements is incorrect.

What was the issue referred to the CJEU?

The case which is a referral from the UK Supreme Court concerned a disagreement between VWFS and HMRC over VWFS’s right to recover VAT paid on overhead costs incurred in its provision of hire purchase agreements.

Under UK legislation hire purchase contracts are treated as two distinct transactions:

  • a taxable supply of a vehicle, and
  • an exempt supply of credit.

Since the price charged for the vehicle to the customer must be limited to its exact purchase price, i.e. the amount paid by the lessor to the dealer, the amount of output VAT charged to the customer is exactly equal to the input VAT incurred on the vehicle purchase, which can therefore be reclaimed in full. The remainder of the lessor’s costs, however, are covered by the revenue generated from the exempt supply of credit.

The UK Supreme Court was uncertain as to the correct approach regarding the deduction of input VAT on the lessor’s overhead costs, which to an extent are used for the purposes of the taxable supply of the vehicle, but which are in fact covered by the exempt revenue from the supply of credit.

The AG’s Opinion

The AG was of the view that it was impossible to give a correct response to the matter referred without addressing the issue of the UK’s splitting of hire purchase contracts into two distinct transactions – which he concluded was inconsistent with EU legislation.

In his opinion hire purchase agreements constitute a single transaction that should not be split into several transactions, each of which is treated differently for VAT purposes. He considered that splitting hire purchase transactions in this way was contrary to the principle of fiscal neutrality for taxable persons, reduced tax revenue and distorted competition.

He has therefore proposed that, in addition to carrying out an analysis of the questions referred for a ruling, the Court should also address the issue of the tax treatment of hire purchase agreements. The AG held that in his opinion such transactions should be treated as a single taxable supply, with the right to deduct all the VAT on associated costs.

In his concluding remarks that AG proposed that the Court should answer the questions referred for a preliminary ruling by the UK Supreme Court as follows:

“The provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that hire purchase agreements such as those at issue in the main proceedings constitute single complex transactions which are subject to tax, the suppliers in question having the right to deduct all the input value added tax (VAT) on the goods and services used for the purpose of those supplies.

Taxable persons who have benefited from the partial exemption of those transactions under national law do not have the right to deduct the input VAT levied on the goods and services used for the purposes of those transactions, the cost of which has been incorporated into the price of the exempt transactions. It is for the referring court to ascertain whether those taxable persons may request the full taxation of those transactions in order to be able to benefit from the right to deduct.”


The CJEU does not have to follow the AG’s opinion. However, if it does, the decision will result in a major change in the VAT treatment for hire purchase agreements in the UK. This would not only affect businesses involved in car leasing, but also have an impact on other industries which feature hire purchase arrangements, such as the banking, aircraft and oil sectors.

Such a decision would also affect other EU countries that treat hire purchase agreements in the same way as the UK.

What should hire purchase businesses do now?

UK hire purchase businesses should consider submitting protective input VAT claims now. The claims would only be repaid by HMRC in the event that the CJEU does follow the AG’s opinion.

It should be noted though that any business seeking a full refund of input VAT in respect of the past would also have to account for output VAT on that element of the hire purchase agreement that had previously been treated as VAT exempt.

If a business decides not to change its VAT treatment of past supplies of finance, it would not be entitled to a full refund of input VAT incurred.

Hire purchase businesses would also need to consider the implications of such a decision on existing partial exemption agreements with HMRC.

The AG’s opinion is available in full here.

Please get in touch if you think your business could be affected if the CJEU follows the AG’s opinion in this case.

We would be happy to assist you in analysing the VAT implications for your business, including:

  • quantifying any VAT refund claims
  • maximising your future VAT recovery, and
  • renegotiating your partial exemption method