VAT Focus – A Round-up Of Recent VAT-related Developments, March 2007

Special partial exemption method for hire-purchase agreements

A recent VAT Tribunal concerned hire-purchase agreements entered into by the Lombard Finance Group (part of the appellant’s VAT group) with its customers.The bank had applied a VAT recovery rate of 15%, as negotiated back in the 1970s between HM Customs & Excise and the Finance Houses Association. This method was subsequently thought to be no longer appropriate and the taxpayer proposed a transaction-based method arguing that each hire-purchase agreement should consist of two supplies: goods and credit. HM Revenue & Customs’ (HMRC) policy however was to accept nil recovery, apparently on the assumption that most of the bank’s efforts and costs were used in connection with granting credit. The officer giving evidence did not support this, but nor did he regard the proposed recovery rate of 50% as fair and reasonable. The Tribunal agreed with the taxpayer on the basis that the proposed method was fair and reasonable and the