The Court of Justice of the European Union (“CJEU”) gave its decision recently in the Banco Mais SA (“Banco”) VAT case. The case concerns VAT partial exemption and which values should be considered turnover for the 
purposes of calculating the deductible proportion of overhead input tax.
Banco’s activities
• Banco is a Portuguese bank which carries out leasing activities in the automotive sector;
• Banco enters into finance lease arrangements with its customers;
• Banco acquires goods from a third party and supplies them on to the customer under a finance lease; and
• In return for this the customer pays Banco a “rental” payment which covers the cost of the goods, an interest charge and any other charges that might be due.
What is the case about?
In 2004 Banco recovered the full amount of VAT paid on the acquisition of the goods and services which were used exclusively for the purpose of carrying out taxable transactions. This included the acquisition of the vehicles.
With regard to mixed use goods and services, Banco calculated the deductible proportion of the VAT incurred on the basis of a fraction containing, as a numerator, the payments collected from the financial transactions in respect of which VAT is deductible, to which the turnover from leasing transactions was added. This method enabled Banco to reclaim 39% of the VAT incurred on the purchase of goods and services that related to mixed use goods and services.
In 2007 the Portuguese Tax Authorities assessed Banco for VAT claimed under this method, claiming that the calculation used to determine the VAT recoverable on the leasing transactions should have excluded the part of the rental payment which offset the acquisition cost of the vehicles.
Banco appealed the decision and the case was heard by the Lisbon Tax Court in 2008. The Court upheld the action brought about by Banco on the grounds that Banco had correctly applied Article 23(4) of the CIVA (which states that the proportion to be used for mixed use goods and services should be calculated by reference to the share of the turnover relating to transactions in respect of which VAT is deductible). Under this provision Banco should have been allowed to take account of the whole of the rental payments made in determining how much of its input tax should be reclaimed.
The Lisbon Court sought a referral from the CJEU. The referral sought guidance on the value to be included in the denominator and whether only the interest element should be taken into account, since it constitutes the true remuneration (profit) accruing to the bank from the leasing contract.
What was the outcome?
The CJEU ruled that the inclusion of the entire “rental” payment in the partial exemption calculation is likely to be distortive. Therefore, only the part of the “rental” payment which equates to the “interest” element of the leasing transaction should be included in the numerator and denominator of the pro-rata calculation (this is on the basis that this is more likely to provide an accurate reflection of the extent to which the overheads of the business are used for taxable purposes).
However, the CJEU held that it was for the national court to determine what was more appropriate in the present case. The decision has therefore been put back in the hands of the Portuguese Tax Authorities to determine the way forward for Banco.
What does the decision mean for UK Lenders?
With regard to the UK position you may recall that the VWFS Court of Appeal hearing was vacated pending the outcome of the Banco case. It is likely that this case will now be concluded in light of the CJEU decision. If concluded in favour of the CJEU this will mean that Lenders will be significantly worse off depending upon the current methodology applied. We eagerly await HMRC’s response to the above and would recommend that those affected by the decision to seek advice on possible alternative methods. If you are affected by the decision and would like to discuss the implications in more detail please contact Julie Park on 0208 941 9200 or via email at julie.park@thevatconsultancy.com
