RCB/31/07 Partial exemption – VAT recovery on overhead costs relating to supplies of hire purchase
Revenue & Customs Brief, Issue 31. 30 March 2007
This article explains HMRC's policy on attributing VAT on overhead costs to supplies made under hire-purchase (HP) agreements. It affects businesses that make supplies under HP agreements to consumers, but does not apply to those who arrange such supplies and receive a commission. HMRC is aware that policy is not being applied consistently, so this article confirms the policy to be applied from 1 April 2007. This article also refers to the Tribunal decision Royal Bank of Scotland (2007) VAT Decision 19983 regarding VAT recovery and HP agreements.
Background to VAT recovery
An HP transaction involves the supply of goods on credit terms. Provided the charge for credit is clearly identified to the customer, an HP transaction is treated as two supplies for VAT purposes, comprising—
— a supply of goods which is subject to VAT; and
— a supply of credit which is exempt from VAT.
Businesses making both taxable and exempt supplies must apply a partial exemption method to apportion VAT on overhead costs (such as lighting and heating) to recover that VAT to the extent that the costs are