Application of VAT second-hand margin scheme to repossessed vehicles

Volkswagen Financial Services (UK) Ltd (VWFS) bought vehicles from a dealer to sell to customers under finance agreements. If an agreement terminated before completion VWFS repossessed the vehicle and resold it.

A dispute arose as to the VAT treatment of the resales. VWFS argued the second-hand margin scheme applied so that VAT was charged only on the difference between the price paid by the dealer and that received on the resale. The First-tier Tribunal agreed with HMRC that the second-hand margin scheme did not apply to resales. The taxpayer appealed.

The issue before the Upper Tribunal was whether there was a supply of goods by customers to VWFS when the vehicles were repossessed. Only if there were could the resale fall within the second-hand margin scheme.

In brief VWFS said there was a supply of goods under the Principal VAT Directive Art 14(1) which describes this as ‘the transfer of...