HM Revenue and Customs Brief 43/10
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VAT: 'Italian Republic' claims for overpaid VAT – partial
exemption implications of the ECJ decision in Nordania Finans
This Brief gives information concerning a review by HM Revenue
& Customs (HMRC) of the proper treatment of claims submitted as
a result of the Italian Republic ECJ decision (C-45/95). The claims are
for output tax over-declared on car sales where input tax was blocked
on the purchase of the cars and typically involve the sale of
demonstrator vehicles, courtesy cars and daily rental vehicles by
businesses in the motor trade. A large number of such claims were
submitted following the House of Lords decision in Fleming/Condé Nast.
UK law on the input tax block was changed in 1999 and so these claims
are for historic periods only.
Following a review of the implications of the ECJ decision in
Nordania Finans, HMRC is of the view that these claims did not take
proper account of European case law on partial exemption. As a result
HMRC is asking those businesses whose claims have not yet been paid to
revise their claims to take account of the partial exemption
implications. Where claims have already been repaid by HMRC without
making adjustment for partial exemption HMRC is issuing recovery
assessments subject to the appropriate time limits.
Further information on partial exemption can be found in
Notice 706, Partial Exemption, and the partial exemption section of
HMRC VAT guidance.
Background – output tax declared on cars
Until 1 December 1999, input tax on new cars bought by
businesses in the motor sector for use in their business before sale
was blocked. To prevent double taxation when such cars were sold VAT
was chargeable on the margin (if any) over the purchase price. However
this still left some output tax payable in many cases. In 1997 the ECJ
ruled that the only correct way of preventing double taxation of goods
on which no input tax deduction was allowed is for the sale of the
goods to be exempt from VAT. In response the former HM Customs
& Excise issued Business Brief 23/97 in October 1997 inviting
claims for overpaid VAT.
Background – claiming VAT exemption and partial exemption
When UK law says a supply is taxable but European law says it
is exempt taxpayers are entitled to claim exemption. However such
claims must take into account the effect of the additional exempt
supplies on the taxpayer’s ability to deduct input tax (partial
The effect of partial exemption on motor sector businesses
depends on whether cars owned by and used in the business for a limited
time (such as demonstrators) can be treated for partial exemption
purposes as capital goods used in the business. This is because the
sale values of any such goods must be excluded from partial exemption
Until 2001 it was HM Customs and Excise’s policy that
demonstrator cars should not be classified as capital goods and
therefore should be included in partial exemption calculations. This
resulted in Italian Republic claims being reduced to take account of
the partial exemption impact.
In 2001 however, the High Court ruled in JDL Ltd –v– CCE that
demonstrator cars were capital goods used in a car dealer’s business.
It was therefore accepted that, other things being equal, 'Italian
Republic' claims for over-declared output tax need not take partial
exemption into account. A number of claims have been repaid by HMRC on
The ECJ decision in Nordania Finans, case C-98/07
In March 2008 the ECJ delivered its decision in the case of
Nordania Finans A/S v Skatteministeriet. This case concerned whether
cars bought for leasing followed by sale were capital goods used in the
business. Nordania’s business model was to buy cars, lease them for a
fixed period of eighteen months and then sell them at auction. Through
these two ways of exploiting their assets they realised sufficient
funds to cover their direct costs and overheads. The ECJ ruled that the
exclusion of the sales, when the sales were an integral part of their
business model, would distort Nordania’s partial exemption
calculations. The sales should therefore not be seen as sales of
capital goods used in Nordania’s business.
After due consideration, HMRC has concluded that Nordania has
over-turned JDL. The sale of cars that were bought to be used in a
motor sector taxpayer’s business for a limited time and then sold is an
integral part of that taxpayer’s business. As such, based on Nordania,
it would distort partial exemption calculations to exclude the sale,
and the cars cannot be viewed as capital goods used in the business. As
a result any claim for over-declared output tax arising from the
'Italian Republic' case must take the impact of partial exemption on
deductible input tax into account. Furthermore, in submitting an
'Italian Republic' claim businesses make themselves partly exempt.
Therefore it may also be necessary to consider partial exemption
implications where there was no consideration of partial exemption when
the Italian Republic claim was made and any other claims have
subsequently been submitted following Fleming/Condé Nast and for the
periods covered by the previous claim.
The way forward
Where businesses have invoked the Italian ECJ decision and any
claims have not yet been paid HMRC will be writing to businesses
inviting them to submit revised claims which take proper account of the
partial exemption implications before any payment is made.
HMRC are reviewing claims which have been repaid without
taking proper account of partial exemption and, in appropriate cases,
issuing recovery assessments for repayment of tax and statutory
interest subject to the time limits in the VAT Act 1994. Default
interest will be charged where appropriate. Where payments have been
made incorrectly and there is insufficient time to accurately establish
the position before assessment time limits expire, HMRC will issue
estimated assessments on a best judgement basis. Where this happens
HMRC will remain open to working with the businesses concerned to
establish the exact impact and amend assessments where appropriate.
About the Author
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Article Published/Sorted/Amended on Scopulus 2010-10-18 13:53:43 in Tax Articles