Volkswagen Financial Services (UK) Ltd v Revenue and Customs [2017] UKSC 26

VWFS provided hire purchase finance for Volkswagen vehicles. The dispute concerned whether residual input VAT on general overheads could be partially attributed to taxable vehicle supplies. The Supreme Court dismissed HMRC's secondary ground on apportionment, referring the main issue to the CJEU.

Facts

Volkswagen Financial Services (UK) Ltd (“VWFS”), part of the Volkswagen Group, provides hire purchase (“HP”) finance for the sale of vehicles manufactured by the group. When a customer of a VW dealership wishes to use VWFS finance, VWFS acquires the vehicle from the dealer and supplies it to the customer on deferred payment terms under an HP contract, at the same price as it was purchased from the dealer.

The case concerned the VAT treatment of general business overheads not directly attributable to particular supplies. A “partial exemption special method” (“PESM”) had been agreed with HMRC for valuing the proportion of residual input tax attributable to HP transactions. The question was whether any residual input tax paid by VWFS in respect of general overheads (so far as apportioned to the retail sector) was deductible against the output tax paid on the taxable supply of vehicles to customers.

HMRC contended that the overheads were all attributable to the exempt supplies of finance, making the input tax irrecoverable. VWFS argued that residual input tax should be split in proportion to the ratio of taxable transactions to the whole, producing a 50/50 split for HP transactions. The First-tier Tribunal (“FTT”) and Court of Appeal found for VWFS; the Upper Tribunal favoured HMRC.

Issues

The principal issue concerning the attribution of residual input tax was referred to the CJEU. The present judgment addresses a secondary issue: whether HMRC had advanced a fall-back argument before the FTT that, even if some apportionment to taxable supplies were appropriate, a figure lower than 50% should be attributed, and whether the FTT erred in failing to consider it.

Arguments

HMRC (Appellant)

Mr Thomas QC submitted that HMRC had challenged the apportionment formula on wider grounds before the FTT, contending that a lower figure than 50% should be attributed to taxable supplies. He relied on Lord Carnwath’s observations in Pegasus Birds Ltd v Revenue and Customs and Excise Comrs [2004] EWCA Civ 1015 that the tribunal’s primary task is to find the correct amount of tax, and on Banbury Visionplus Ltd v HMRC [2006] EWHC 1024 for the proposition that the tribunal has jurisdiction to decide whether a particular method would achieve the statutory objective.

VWFS (Respondent)

Miss Shaw QC submitted that proceedings before the tribunal are adversarial, not inquisitorial, and it is no part of the tribunal’s role to undertake a roving review of the dispute of its own motion, citing Tynewydd Labour Working Men’s Club and Institute Ltd v Customs and Excise Comrs [1979] STC 570.

Judgment

Lord Carnwath (with whom the other Justices agreed) dismissed this ground of appeal. He held that the issue did not require examination of general questions about the tribunal’s role. While the new tribunal system has flexibility and a more inquisitorial role may be appropriate in some areas, particularly those involving litigants in person, where the tribunal is dealing with substantial litigants represented by experienced counsel it is entitled to assume that the parties will have identified with care what they regard as relevant issues for decision.

Lord Carnwath clarified that his comments in Pegasus Birds were not of general application but were intended to discourage undue attention to the Commissioner’s original exercise of “best judgment”, as opposed to the correctness of the result.

Particular importance was attached to the tribunal’s own understanding of the issue, as expressed in its introduction to the detailed discussion, where it stated that the 50/50 weighting was not at issue and that the dispute was solely about whether any part of the residual input tax should be attributed at all to the taxable supply of the vehicle. The tribunal had itself apparently sought clarification on this point.

Lord Carnwath agreed with Patten LJ that there was no material which could justify going behind that clear statement of the position. If the tribunal was thought to have misunderstood HMRC’s position, the time to raise the matter was when the decision was received, while the issues were fresh. The tribunal’s understanding was consistent with the lack of any specific reference to the alternative apportionment issue in HMRC’s written submissions or witness evidence, and the passing reference in cross-examination added nothing.

Implications

The decision confirms that, in tribunal proceedings involving substantial litigants represented by experienced counsel, the FTT is entitled to proceed on the basis of the issues identified by the parties and is not obliged to conduct a wider inquisitorial review. Where a party considers the tribunal has misunderstood its case or omitted a material issue, this should be raised promptly with the tribunal rather than reserved for later appeal.

The decision also clarifies and limits the scope of Lord Carnwath’s earlier observations in Pegasus Birds, confirming they were directed at the issue of “best judgment” assessments rather than imposing a general inquisitorial duty on the tribunal. The flexibility of the tribunal procedure permits a more inquisitorial approach in cases involving unrepresented litigants, but this is not the default approach in commercial VAT disputes.

The main substantive question concerning attribution of residual input tax on overheads in HP transactions remained to be resolved by reference to the CJEU.

Verdict: The Supreme Court dismissed HMRC’s ground of appeal concerning the secondary apportionment issue. The main issue regarding attribution of residual input tax was referred to the CJEU.

Source: Volkswagen Financial Services (UK) Ltd v Revenue and Customs [2017] UKSC 26