A forthcoming VAT case at the House of Lords could open an opportunity for car fleet buyers to recover previously unclaimed VAT whilst changes to the VAT treatment of services may close a current opportunity for car fleet lessors.

David Raistrick, Tax Partner, and Andy Green, Senior Manager, in the Automotive Group at Deloitte, consider two topical VAT matters in relation to car fleets.

Since the introduction of VAT in April 1973, HM Revenue and Customs (HMRC) has struggled with the VAT treatment of company cars because, as an asset, they inevitably have both business and private use. HMRC's answer was to block VAT recovery for corporate users on the purchase of cars and, in later years, to introduce a 50% block of VAT incurred on lease rentals.

During the 1990's, action in the UK and EU courts challenged HMRC’s block on the recovery of VAT incurred on the purchase of new cars. HMRC, it was argued, had no right under EU law to impose a VAT block. Ultimately, these challenges were unsuccessful. However, for the leasing industry, there was a positive outcome in that the VAT block on cars purchased by them for onward lease to corporate customers was removed. For the bulk of business purchasers though the VAT block remained in place and as a result the VAT problem is still live for many fleet operators.

At various times confusion has reigned and, against this background, this article looks at two topical VAT issues in relation to VAT recovery. The first is a potential VAT refund opportunity in respect of fleet rebates. The second concerns managing VAT costs through cross-border leasing.

Fleet Rebates

Prior to 1995, HMRC did not accept that a business in receipt of a rebate (“bonus”) from a motor manufacturer could reduce the amount of VAT blocked on the purchase of the car by the VAT element of the rebate. This position was challenged following a European VAT case and, from 1995, HMRC accepted that the bonus did in fact reduce the consideration paid for the vehicle and therefore the amount of VAT payable to HMRC. Some businesses, particularly in the automotive retail and leasing sectors, lodged successful retrospective claims to this effect.

Around the same time HMRC introduced legislation capping the period over which retrospective VAT claims could be made to 3 years. The immediate introduction of the cap prevented many businesses from making claims and now litigation, brought by Conde Nast and Fleming, will shortly be heard together in the House of Lords to challenge whether the 3 year cap is valid. Although we cannot be sure what the Lords will decide it is worth noting that both cases were decided in favour of the taxpayers at the previous stage of the litigation (in the Court of Appeal).

Should the litigation be successful retrospective claim periods will be reopened and fleet operators will again be able to submit claims where they have not already done so. The VAT in question relates to rebates received in the period 1988 – 1996 when VAT was included in the rebate amounts. In some circumstances it may be possible to make claims pre-1988 but only a limited number of manufacturers included VAT in their rebates at this time and claimants will need to be certain on this point.

It is also worth noting that if claim periods are reopened the period in which to submit a claim is unlikely to be open ended. As a result any business considering making a claim should take action now.

Cross-Border Leasing

Cross-border car leasing as a method of managing VAT costs has been around for many years although in practice is carried out by relatively few businesses. The arrangement works by utilising the lower level of VAT restriction applied to leasing costs in some EU Member states than the UK’s 50% block. Indeed Germany is notable in that it applies no restriction. By taking advantage of the German treatment, fleet operators can decrease the amount of irrecoverable VAT they incur in respect of lease rental.

To achieve this, it is necessary for the UK business to enter into a cross-border leasing agreement with a leasing company established in Germany. The vehicles themselves remain in the UK at all times. However, the lease is subject to German rather than UK VAT. The German VAT is paid to the leasing company but is reclaimed from the German tax authorities who will refund the VAT incurred in full on the basis that it has been incurred for a business purpose.

The arrangement is based on accepted European Law but perhaps the reason cross-border leasing has not been widely implemented is that unless an existing commercial model is in place, the structure has an element of artificiality which immediately places it under the discouraging spotlight of HMRC and other tax authorities.

However, many businesses with pan European leasing requirements often have or use an existing overseas leasing company or would benefit commercially by doing so – through the ability to agree discounts with manufacturers, centralise large fleet operations etc. For these businesses the structure may still be worthwhile but will need to be weighed up against proposed changes to the EU VAT rules dealing with where services (including leasing) are taxed and which may remove the VAT benefit achieved in the short to medium term.