The dispute stemmed from a customer who defaulted on monthly repayments for a motor vehicle purchased under a high purchase agreement with the finance house.
Customs took the view that any apportionment of unpaid amounts must be attributed to the earliest supply made which it considered to be the delivery of the car, rather than the supply of credit.
This meant that a default on payment towards the end of the credit period would allow the finance house no relief from VAT payments as it would not include an ‘interest’ amount.
The finance house argued that attribution should be on a ‘straight line basis’ as each instalment payment was a mixture of interest and capital right up until the end of the repayment periods.
The matter was due to come before the VAT and Duties Tribunal from the 22-24 October, but Customs decided to withdraw its appeal and allow E&Y’s client its tax claim for all defaulted payments, and indicated that it had changed its policy on the administration of bad debt relief claims.
In the future the ‘straight line’ method of apportioning unpaid amounts to capital and interest would be used.
E&Y tax adviser Peter Jenkins said the outcome of the case could potentially benefit other companies that provide higher purchase credit, allowing them to make claims going back three years, and to apply the ‘straight line’ method of allocation for the future.
The finance house said it was a ‘victory for common sense’, adding that Customs had adopted a ‘narrow view’ that was contrary to EU VAT law.
Customs is due to publish a Business Brief on the changes to VAT bad debt relief in the near future.
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