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.
