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VAT recovery in the leasing and hire-purchase sector

Lessors and input tax recovery

A lessor who enters into hire-purchase transactions with a separate exempt finance facility will make a mixture of taxable and exempt supplies (for the liability of supplies see 'VAT liability of leases and hire-purchase agreements' at V6.288). A key VAT issue for the sector will therefore be partial exemption. Partial exemption is covered at V3.460–V3.470. Many in the sector will wish to agree bespoke special recovery methods with HMRC (see V3.462 for details of special methods).

There has been historic disagreement between HMRC and the sector as to fair ways to apportion VAT on overheads related to hire-purchase supplies (see 'Recovery of overheads in relation to hire purchase supplies' at V3.464A. Note, in particular, the CJEU's decision in Volkswagen Financial Services (VWFS) (C-153/17) and HMRC's subsequent guidance on a recommended method for calculating recoverable VAT (since incorporated into PE73200).

Partial exemption and the reverse charge

When partly exempt businesses in