General Motors' "windfall" VAT repayments on resold hire-purchase cars were legitimate, CJEU rules

The UK's upper tier tax tribunal (UTT) had referred the case to the Court of Justice of the European Union (CJEU) after HM Revenue and Customs (HMRC) argued that the taxpayer would receive a "windfall" in a manner that was unintended by the EU's VAT Directive.

Where a car is sold on a hire purchase agreement, then the VAT is due at the outset on the full sale price. If the purchaser defaults on the payments then the VAT on the car may be reclaimed from HMRC by the finance company under EU law. However, subsequent UK legislation, the Car Order, allowed the finance company to sell the repossessed car at auction without that sale being subject to VAT.

HMRC wanted GMAC to pay VAT on the "consideration actually received by the [finance company] for the supplies made" of the cars. However, the interaction between the Cars Order and the bad debt relief rules meant that GMAC was entitled to claim a refund while at the same time selling on the cars without making a taxable supply for the purposes of VAT law.

In its judgment, the CJEU drew a distinction between situations in which a taxpayer structured its transactions in order to deliberately obtain a tax advantage contrary to the EU VAT Directive, versus those circumstances where a taxpayer could choose from a number of possible transactions and exercise its lawful entitlement to structure its affairs in such a way as to legitimately limit its tax liability under those rules.

"In the sphere of VAT, an abusive practice can be found to exist only if, first, the transactions concerned, notwithstanding formal application of the conditions laid down by the relevant provisions of [the VAT Directive] and the national legislation transposing it, result in the accrual of a tax advantage the grant of which would be contrary to the purpose of those provisions and, second, it is apparent from a number of objective factors that the essential aim of the transactions concerned is solely to obtain that tax advantage," it said in its judgment.

"As is apparent from [the judgment] the attainment of the tax advantage in question arises, in essence, from the fact that, under [the Cars Order], there is no taxation of the sale at auction of the car recovered from the hire purchase customer … Where it is possible for the taxable person to choose from among a number of transactions, he may choose to structure his business in such a way as to limit his tax liability," it said.

"It appears from the documents submitted to the court that if the sale at auction of the repossessed car were not, under the national legislation itself, exempt from VAT the consideration received for each transaction would be subject to tax," the CJEU said in its judgment.

"It is appropriate in this regard to recall the court's settled case law, according to which a member state which has not adopted the implementing measures required by a directive within the prescribed period may not plead, as against individuals, its own failure to perform the obligations which the directive entails. Accordingly, the fact that, under national law, the sale at auction of the vehicle was treated neither as a supply of goods nor a supply of services cannot lead to the taxable person being denied the right to a reduction in the taxable amount in the event of total or partial non-payment, as provided for in [the VAT Directive]," it said.

VAT and indirect taxes expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that although the CJEU's decision would be of immediate interest to UK businesses whose claims on the windfall point depended on the outcome of the GMAC case, it could also be of wider application to taxpayers across Europe.

"In essence, the CJEU has ruled that a member state should not refuse issuing a VAT refund by hiding behind its own failure to anticipate an interaction between the VAT rules on a domestic and international level," he said. "To some extent the CJEU is modifying a well known maxim in telling HMRC and the UK government 'caveat scriptor' or writer beware! The power to draft legislation is accompanied by the responsibility to ensure that it produces the desired consequences."

"The trail of GMAC cases along with decisions such EON Asset Management, Mercedes Benz Financial Services and Volkswagen Financial Services indicate that the area of asset finance and similar credit agreements continues to be difficult territory from a VAT perspective. The rejection of HMRC's "windfall" argument may well have repercussions in other sectors," he said.