PE73200 - Guidance for specific trade sectors: finance: finance houses: attribution of input tax on overheads

On 31 January 2000, following consultation with the Finance and Leasing Association (FLA), the agreement between HM Revenue and Customs (HMRC) and the FLA’s predecessor, the Finance Houses Association Ltd, which allowed their members to recover 15% of the VAT incurred on general overheads used in carrying on their Hire Purchase (HP) business, was withdrawn. There followed a period of consultation and litigation to determine what should replace this agreement by way of guidance to businesses on how to recover the VAT incurred on general overheads in a Partial Exemption Method which deals with HP supplies.

When considering PE methods, the following points need to be considered:

• It is usually necessary to identify, by an agreed means, the proportion of residual expenditure relating to leasing, instalment credit finance (or hire purchase) and any other activities (e.g. unit stocking, lending etc). Whatever fraction is used should be an acceptable proxy for ascertaining the use of the expenses in each area. (See PE22500 - Allocation in special methods).
• Input tax incurred by a finance house on the purchase of goods to supply under a hire purchase, lease-purchase or leasing agreement would normally be fully recoverable as being directly related to an onward taxable supply of goods or services.
• Input tax incurred on general overheads used in making taxable leasing services, would also be recoverable under the terms of any PE method.

Following the CJEU judgment in Volkswagen Financial Services (C-153/17), and subsequent consultation with the FLA, HMRC has published a recommended method for calculating recoverable VAT on hire purchase agreements. HMRC’s position is that the calculation should be as set out as:

Value of the asset plus any taxable additional charges or fees received	x 100
Value of the asset plus value of the credit granted *(should correspond to the value of the asset), plus consideration for the credit as per the credit agreement and any additional charges, related commission or other fees received

*Where the amount of credit is less than the total value of the asset then both the amount shown as value of the asset and value of the exempt credit would be reduced.

This partial exemption method will be the preferred method for the industry. However, it will not be compulsory, and businesses can continue to apply any fair and reasonable partial exemption method already agreed with HMRC.