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HMRC internal manual

VAT Partial Exemption Guidance

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HM Revenue & Customs
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Guidance for specific trade sectors: finance: sale of ex-lease assets

Sale of ex-leased goods in turnover based PE methods

In the ECJ case Nordania Finans A/S, BG Factoring A/S [C 98/07], the Court concluded that ex-leased goods which are sold once the leasing period has come to an end, are not capital goods used for the purpose of a taxable persons’ business, and the value of the sale should be included in a turnover based partial exemption method. The reason was that the sale of such assets is a normal part of its everyday business activity and did not distort the PE calculation.

Nordania Finans A/S, BG Factoring A/S [C 98/07] was a vehicle leasing business. Danish legislation required them to exclude the value of the leased-goods from turnover based methods of determining the recoverable proportion of input tax when the vehicles were sold post-lease. This requirement is similar to that in UK legislation, regulation 101(3)(a), where it says that businesses should exclude the value of the supply of any capital goods used for the purpose of the business from a partial exemption standard method. Businesses are also required to exclude such values from partial exemption special methods (regulation 102(2)).

Nordania argued that the ex-leased vehicles were not capital goods used for the purpose of its business, but that they were used in the course of business, therefore the values of the sales of those goods should be included in the calculation.

The ECJ agreed with Nordania that assets which have been leased out and then sold on post-lease are not to be treated as capital goods for the purposes of Article 19(2) of the Sixth directive (now Article 174) as the sale of such vehicles at the end of those contracts is an integral part of the usual business activities of that type of business.

Although the UK standard and special methods are based on Article 173(2)(c) and (d) and not Article 174, the principle of the exclusion of a supply of a capital good used for the purposes of a taxable person’s own business applies. Therefore this decision will apply to UK partial exemption methods and the value of the supply of ex-leased assets should be included when carrying out partial exemption calculations, subject to the guidance below.

There may be some instances where certain partial exemption special methods specify that the values of ex-leased goods should be excluded. This is often the case where including them would create distortion so, to provide a fair and reasonable reflection of how input tax is used in that business, the method requires that the values are excluded.

There are some leasing businesses which include some or all of the expected post-lease sale value of the assets into the price of their leasing charges to the customer over the course of the leasing period. When the lease period is up, the goods are sold and money received from the sale is passed on directly to the customer. This is called rebate of rentals. It would not be appropriate to include both a) the full value of the sale of the un-rebated rentals received; and b) the value of the sale in the partial exemption calculations in these cases, as that would double-count the value of taxable supplies.

This decision has no impact on the treatment of disposals of goods repossessed under HP agreements which are not considered capital goods used by the HP company for the purposes of its business.