Unreasonable apportionment

The taxpayer company Volkswagen Financial Services (UK) Ltd was ultimately owned by Volkswagen AG. It made taxable and exempt supplies making it a partially exempt trader for VAT. It incurred residual input tax which related to ordinary overhead expenditure.

The company’s business covered various areas including hire purchase. The dispute was over the treatment of the residual input tax on overheads attributable to the transactions.

The taxpayer firm took each deal as one taxable transaction – the sale of a vehicle at cost price – and one exempt transaction – the finance element – and split the residual input tax equally between the two.

HMRC argued the residual input tax in respect of hire purchase transactions was largely not deductible.

The department apportioned the residual input tax between the value of the taxable and exempt outputs of each transaction without taking into account the sale...