4 August 2014

There has been a judgment of the Court of Justice of the European Union (CJEU) in Banco Mais Case C-183/13. This case concerns the leasing of vehicles, where the leasing charges are taxable. The bank also carried out other activities which were exempt. Banco Mais argued that it should be entitled to recover input VAT on its overheads according to the proportion of the value of taxable supplies to total supplies, but the Portuguese tax authority considered that it made its profit on leasing transactions from the charging of interest and so the values based method was distortive. They assessed by excluding the value of the goods from the calculation, allowing only the interest element to be treated as taxable turnover, arguing that this methodology gave a more reasonable measure of the “use” of inputs.

Whilst leaving the final decision to the Portuguese courts as to whether the Banco Mais method was distortive in the present case, the CJEU gave a strong steer to suggest that it was. The situation appears to be very similar to a case on hire purchase which is proceeding in the UK – that of VW Financial Services which was deferred by the Court of Appeal pending the Banco Mais judgment.

Banco Mais also has implications for the more recent UK Upper Tribunal judgment in Lok’n’Store which HMRC lost but are considering whether to appeal further. The issue in this latter case is the apportionment of input tax where the taxable supplies are of self-storage and the exempt supplies are of insurance for the stored goods. HMRC in this case need to argue that there is a significantly greater amount of input tax attributable to the insurance, which is profitable but not consuming a lot of cost. They are therefore taking the position that a values-based method is more fair and reasonable than a floor space method.

Businesses throughout the EU will be reviewing their treatment of input VAT in relation to leasing transactions, and perhaps they should also consider the possible impact on all scenarios where insurance is sold with taxable goods or services.