On 3 May 2018, Advocate General Spuznar released his opinion in Volkswagen Financial Services UK Ltd (C153/17), in which he expressed the opinion that the current UK VAT treatment of vehicle purchase agreements is incorrect.


The case was referred to the CJEU by the UK Supreme Court. The issue in the case is whether Volkswagen Financial Services (VWFS) is able to recover VAT paid on overhead costs incurred in its provision of hire purchase agreements.

Regular readers of our Updates will recall that we reported on the Supreme Court’s decision in our April 2017 Update, a copy of which is available to view here.

Briefly, VWFS is an ultimately owned subsidiary of the Volkswagen Group. The company exists solely to provide prospective buyers of the Volkswagen Group’s vehicles with a hire purchase finance option. When a customer purchased a vehicle on hire purchase, VWFS would acquire the vehicle from a dealer and then supply the vehicle to the customer, charging the customer the same price as it had paid the dealer.

For VAT purposes, VWFS was treated as making two separate supplies: a taxable supply of the vehicle (in respect of which it accounted for output tax on the price of the vehicle) and an exempt supply of finance. However, VWFS could only deduct input tax in respect of the taxable supplies. Although some of its expenditure was directly attributable to the taxable supplies, some, such as expenditure on general business overheads, could not be directly attributed to specific supplies.

Given the difficulty in assessing which expenses could be deducted, HMRC agreed a partial exemption special method with VWFS for valuing the proportion of the residual input tax attributable to the exempt transactions. VWFS interpreted that method as enabling it to recover 50% of the input tax on its overheads on the basis that the overheads were wholly attributable to both the taxable and exempt supplies. HMRC considered that the overheads were wholly attributable to the exempt supplies of finance, and the input tax in respect of such supplies was therefore irrecoverable.

The FTT and the Court of Appeal found in favour of VWFS, concluding that the overheads could be treated as cost components of both the taxable and exempt supplies. The UT agreed with HMRC’s approach that as the taxable supply was at cost, the overheads could only be attributable to the exempt supply.

On appeal, the Supreme Court decided that guidance was required from the CJEU in respect of HMRC’s approach to the apportionment of residual input tax.

AG’s opinion

Following a review of the relevant authorities, the AG agreed with HMRC that a cost must be a cost component of a taxable supply to be deductible. However, the AG also agreed with VWFS that factually some of the goods and services contributing to the overheads must be used for its taxable transactions.

The AG then went on to consider the UK’s treatment of hire purchase contracts. Although this was not part of the questions that had been referred, in his opinion, it was not possible to give a correct response to the matter without addressing this issue.

In the view of the AG, the current UK treatment of splitting a supply of a vehicle on hire purchase terms into an exempt supply and taxable supply is flawed and inconsistent with EU legislation. In his view the 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 splitting a transaction in this way is artificial and contrary to the principle of fiscal neutrality, reduced tax revenue and distorted competition.

In light of this, the AG suggested that in addition to carrying out an analysis of the questions which had been referred for a ruling, the CJEU should also address the issue of the tax treatment of hire purchase agreements. In the opinion of the AG, such transactions should be treated as a single taxable supply, with the right to deduct all the VAT on associated costs. 


Having opined that hire purchase agreements are taxed incorrectly in the UK, the AG essentially reformulated the questions that the referring court should consider. It will be interesting to see if the CJEU follows the AG’s approach. If it also considers that the transactions should be treated as a single taxable supply, this will result in a significant change in the VAT treatment for hire purchase businesses across a range of sectors.

The CJEU’s judgment is expected shortly, following which the matter will be referred to the Supreme Court to determine what proportion of residual input tax (if any) is recoverable by finance houses.

A copy of the AG’s opinion is available to view here.