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HMRC have published details of their review of the treatment of claims submitted as a result of the Italian Republic (C-45/95) decision.
The claims are for output tax over-declared on car sales where input tax was blocked on the purchase of the cars often involving the sale of demonstrator vehicles, courtesy cars and daily rental vehicles by businesses in the motor trade.
In Nordania Finans A/S v Skatteministeriet (C-98/07), a case which concerned whether cars bought for leasing followed by sale were capital goods used in the business, the European Court of Justice ruled that the exclusion of the sales, when they were an integral part of their business model, would distort Nordania’s partial exemption calculations, so they should not be seen as sales of capital goods used in Nordania’s business.
Having reviewed Nordania, HMRC consider that the case overturns the High Court decision in JDL v CCE [2002] STC 1 and that the claims for output VAT on demonstrator cars did not take proper account of European case law on partial exemption.
As a result, the Revenue is asking businesses whose claims have not yet been paid to revise these to take account of the partial exemption implications.
Where claims have already been repaid without making adjustment for partial exemption, HMRC will be issuing recovery assessments.
Neil Warren, independent VAT consultant, said, ‘This shows how complicated VAT becomes when many different topics overlap with each other, namely partial exemption, liability of sales and error adjustment periods. I am comfortable with the concept that the sales of ex-leasing vehicles should be within the partial exemption calculations.
'These vehicles are linked to customer use so are usually part of a clear business model, but demonstrator cars put to use by an employee is a different issue. I suspect there could be some complaints by the car trade... on these items being included.’
