When Volkswagen Financial Services supplied cars on hire purchase, it paid VAT on general overheads that could not be tied to a particular supply. The Supreme Court did not decide whether any of that VAT was deductible against the output tax on the taxable supply of the cars, because it considered a reference to the CJEU necessary. It rejected HMRC’s separate argument that the First-tier Tribunal should have considered attributing less than 50% of the relevant overhead VAT to those taxable supplies.
The hire purchase arrangements
VWFS, a member of the Volkswagen Group, provided hire purchase finance for the group’s vehicles through its retail sector. Where a customer of a Volkswagen dealership wanted that finance, VWFS bought the vehicle from the dealer and supplied it to the customer on deferred payment terms, at the same price it had paid the dealer.
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The appeal concerned VAT on general business overheads, not costs attributable to a particular supply. The question was whether any residual input tax — the VAT paid on those overheads, so far as apportioned to the retail sector — was deductible against the output tax on the taxable supply of the vehicles. It arose under a partial exemption special method agreed with HMRC for valuing the proportion of residual input tax attributable to hire purchase transactions. Those transactions were treated as including both a taxable supply of the vehicle and an exempt supply of finance.
HMRC’s primary contention was that the overheads were all attributable to the exempt finance, so the input tax was irrecoverable. VWFS said that the residual tax should be split in proportion to the ratio of taxable transactions to the whole. Treating each hire purchase contract as two transactions, and weighting the taxable vehicle supply and the exempt finance supply equally, produced a 50/50 split. The First-tier Tribunal and the Court of Appeal decided that issue in favour of VWFS. The Upper Tribunal had supported HMRC. Lord Carnwath, with whom Lord Neuberger, Lord Kerr, Lord Reed and Lord Gill agreed, said that a reference to the CJEU was necessary before the Supreme Court could conclude the main issue. This judgment dealt only with a secondary argument.
Whether a lower percentage was in issue
Mr Thomas QC argued that HMRC had a fall-back on the amount of any apportionment, which the First-tier Tribunal had failed to consider. Patten LJ recorded HMRC’s contention that it had challenged the apportionment formula in the proposed method on wider grounds, and that a lower figure than 50% should be attributed to the taxable supplies of vehicles, in terms of the use made of the allocated inputs. He was surprised that, with experienced counsel on both sides, the point had not been settled from the written submissions or hearing notes. Lord Carnwath shared that surprise. The Supreme Court examined the available material.
HMRC’s skeleton asked whether VWFS’s method produced a fair and reasonable attribution of residual input tax in the retail sector. It offered no positive alternative to HMRC’s preferred methodology and suggested no different percentage. HMRC’s witness described VWFS’s approach as realistic, perhaps more so than HMRC’s, and identified two concerns, but put forward no alternative apportionment.
Judge Berner’s note recorded Mr Thomas submitting that the value of the car did not bear on the use of the overheads, that 50% was an arbitrary and unexplained figure, and that it was unexplained why hire purchase should be treated one to one rather than by another fraction. The Upper Tribunal read that extract as a request to consider, in the alternative, a figure below 50%. Patten LJ disagreed. He read the submission as challenging 50% as arbitrary in the course of an argument that any attribution was impermissible. HMRC had not relied on an alternative method attributing somewhere between 1% and 50% to the taxable vehicle supplies, and none of the material showed that the tribunal had misunderstood HMRC’s case.
The issues the tribunal had to decide
Mr Thomas submitted that the Court of Appeal had failed to recognise that a tribunal appeal covers both issues of principle and the amount of the assessment. He relied on Lord Carnwath’s statement in Pegasus Birds that the tribunal’s primary task is to find the correct amount of tax, so far as possible on the material properly available to it, with the burden on the taxpayer. He also relied on Etherton J’s conclusion in Banbury Visionplus that nothing excluded the tribunal’s jurisdiction to decide whether a particular method would achieve the statutory objective. Miss Shaw, for VWFS, submitted that those cases did not make the proceedings inquisitorial or require the tribunal to undertake a roving review of its own motion. She relied on Forbes J’s comments on the adversarial nature of proceedings before the former VAT Tribunal.
Lord Carnwath held that the issue did not require a general examination of the tribunal’s role. The tribunal’s procedures are flexible and can be adapted to different cases and litigants; a more inquisitorial role may be appropriate in some areas, particularly where litigants are unrepresented. Where, as here, substantial litigants are represented by experienced counsel, the tribunal is entitled to assume that they have carefully identified the issues for decision. His comments in Pegasus Birds were not of general application. They were intended to discourage undue attention to the Commissioner’s original exercise of best judgment, as opposed to the correctness of the result.
What mattered was the tribunal’s own understanding of the dispute, after it had apparently sought clarification. It said that the dispute went no further than whether any residual input tax should be attributed to the taxable vehicle supply. Ease of audit and operation were not in issue, nor was the proposed 50/50 weighting between that supply and the exempt supply of finance. HMRC’s evidence accepted the weighting as realistic and conceded that it might be more realistic than HMRC’s method.
Lord Carnwath agreed with Patten LJ that there was no material which could justify going behind that clear statement. Mr Thomas had no recollection of a request for clarification, but if HMRC thought that the tribunal had misunderstood its position and failed to deal with a significant issue, that should have been raised when the decision was received, while it was fresh in everyone’s minds. The tribunal’s understanding was consistent with the absence of any specific alternative apportionment in the written submissions or witness evidence. The passing reference in the note of cross-examination added nothing.
Verdict: The Court unanimously dismissed this ground of HMRC’s appeal. It accepted the tribunal’s account of the matter agreed before it. Whether any overhead input tax was deductible, and in what proportion, remained open pending a reference to the Court of Justice.
