Residual input tax is recoverable

Volkswagen Financial Services (UK) was a wholly owned subsidiary of Volkswagen Financial Services AG which was ultimately owned by Volkswagen AG.

 

The company made taxable and exempt supplies making it a partially exempt trader for VAT. An issue arose over the treatment of the residual input tax on general overheads. VFS (UK) treated each deal as one taxable transaction: the sale of the vehicle at cost price and one exempt transaction: the finance element and split the residual input tax equally.

 

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

 

The First-tier Tribunal allowed the company’s appeal but the Upper Tribunal overturned that decision. It ruled that the residual cost inputs had no direct and immediate link with VFS (UK)’s business...