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TaxationWeb by VAT Solutions (UK) Limited

Andrew Needham, Director of VAT Solutions (UK) Ltd, outlines a potential opportunity concerning early terminations of hire purchase agreements for the supply of motor cars following a VAT Tribunal decision.

17990 - General Motors Acceptance Corporation (UK) Plc

This decision addresses various VAT consequences of early terminations of hire purchase agreements for the supply of motor cars. The decision is essential reading for anyone involved with the automotive industry and/or with the finance company sector.

The decision identifies five basic contentions by GMAC:

1) that, where a car is voluntarily returned to GMAC by the hirer under the terms of the agreement, the car is 'repossessed' with the consequence that, under Article 4(1)(a) of the 1992 Cars Order, the onward sale of the car is not a taxable supply (Customs argued that a car is only 'repossessed' where GMAC initiate the repossession under a contractual right to do so within the agreement);

2) that, where a car is repossessed by GMAC upon default by the hirer and then sold, the correct VAT accounting procedure is to recognise a reduction in the value of the original supply under Regulation 38, rather than there being an obligation to effect the adjustment through a bad debt relief claim;

3) that, where on default by the hirer a car subject to a hire purchase agreement is 'sold' to a third party in breach of the agreement but it is not practical for the car to be repossessed, a bad debt relief claim under the BDR regulations up to 20 March 1997 should be allowed as satisfying the condition that 'the property in the goods has passed to... a person deriving title from, through or under that person', ie the condition should be regarded as satisfied even though the hirer did not have good title;

4) that adjustments to the value of the original supply under Regulation 38 can be made in the case of both voluntary return and repossession on default (Customs argued that such a reduction could not be made as GMAC could not produce a credit note, a debit note or any other document evidencing the decrease in consideration);

5) that adjustments to the value of the original supply under Regulation 38 can be made even where they take place more than three years after the original supply (the decision records that, whilst most agreements run for 24 or 36 months, a number do run for longer) as that is a Community law right under Article 11C.1 and that the three year limitation imposed by VAT Regulation 38(1A) should be disregarded as it has no objective justification and violates the Community law rights by making them ineffective.

The Tribunal allowed the appeal in emphatic terms on all five counts.

Action points:

The findings on the two scenarios related to the VAT accounting following defaults may well offer the opportunity for affected parties to make further claims.

The point about the ineffectiveness of three year capping in the scenario of a decrease in consideration after the supply has taken place may have wider implications.


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VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc