bonuses
Motor dealers, and to a lesser extent lessors, have come a step
closer to recovering large amounts of VAT overpaid in past years.
This comes from a House of Lords judicial ruling on 23rd January in
two appeals, one involving a motor dealer (Michael Fleming t/a
Bodycraft) and the other the publisher Condé Nast.
Go deeper with GlobalData
The overpayments resulted from an incorrect application of
European VAT law in the UK. Many commercial sectors are affected,
but in motors it revolves around volume bonuses paid by
manufacturers to franchised dealers and to other major buyers of
new cars. The reclaims are affected by a complex interplay of UK
and European litigation, and the latest case focused on the
statutory time limits for the claims.
The whole issue first came to light with a 1996 ruling by
the European Court of Justice (ECJ) in the Elida Gibbs case. That
did not directly involve cars, but had implications for the VAT
treatment of all incentive bonus payments by manufacturers or other
wholesale suppliers to retailers. Previously the bonuses had to be
treated as reflecting a supply of services by the bulk purchasers
to the manufacturers, and invoiced accordingly with a VAT charge.
From July 1997, HM Customs & Excise (HMCE) – as it was then
called – accepted that this treatment had always been wrong in the
light of Elida Gibbs. Instead bonuses should have been treated as a
price discount on the car purchases, reducing the VAT paid on
them.
Fleet finance implications
For most transactions outside the motor trade, that change made
no real difference, since taxpayers recover all their input VAT
against the output tax on their sales. However, it made a big
difference in car sales because of “input blocks”. Fleet car users
cannot recover VAT on any purchases or lease rentals. Dealers are
similarly input-blocked on demonstrator cars only. Lessors were
input-blocked until July 1995, and daily rental companies until the
end of 1992 – all of which could give rise to back claims wherever
volume bonuses were received.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataAround the same time as Elida Gibbs in 1996-97, UK legislation
cut the periods over which overpaid VAT could be recovered. For
output tax this limit was cut from six to three years. A three-year
limit was also introduced for under-recoveries of input tax,
previously unlimited. No transition periods were allowed for claims
potentially in the pipeline, and this gave rise to new challenges
under European law.
In 2002 Marks and Spencer (M&S) won an ECJ ruling that
the change in the output tax reclaim time limit conflicted with key
requirements in European law, since it was retrospective and
without prior notice.
The latest case brings a similar ruling on the input tax
side, where HM
Revenue & Customs (HMRC) had resisted the logic of the
M&S precedent. The five law lords were unanimous that the motor
dealer, who claimed in 2000 in connection with cars purchased in
1990, had suffered a breach of its European law rights through the
retrospective time limit. By a four to one majority they also found
for Condé Nast, which claimed in 2003 on staff entertainment
expenditure over the 30 years since VAT had been introduced in the
UK.
It seems that HMRC will now have to do for input tax
claims what it did with output tax ones after the M&S case – to
disapply the existing time limit and reintroduce it for the future
with a new transition period.
Billion pound potential
Roger Burrows, head of VAT at Grant
Thornton, suggested that as much as £1bn of VAT could now be
reclaimed by taxpayers. It seems that a sizeable proportion of this
will be in the motor trade.
One case still running through the appeal chain, involving
the Arnold
Clark dealership, could yet affect the final position. The
effect of the incorrect UK VAT treatment of bonuses pre-1997 could
arguably be characterised as either under-recovered input tax or
overpaid output tax. This makes a difference for two reasons. It
was only for output tax that there was any time limit for back
claims before the offending 1996-97 legislation on time limits.
Moreover for output tax, but not input tax, recoveries for periods
after 1990 are subject to an “unjust enrichment” rule whereby HMRC
can refuse to make refunds if the effect of overpayment was passed
on to the taxpayer’s customers.
The dealer in that case has been successful so far, but an
appeal is pending.
