The Royal Bank of Scotland is
considering appealing to the House of Lords after its leasing
subsidiary failed to get agreement to raise the amount of tax it
can recover in hire purchase deals.

Historically, lessors have been able to recover just 15 percent
in HP deals, but Lombard – RBS’ leasing subsidiary – has been
trying to get this raised to 50 percent.

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All companies can recover input tax paid on their costs which
are connected to taxable sales to customers. This recovery,
however, cannot be made when the corresponding sales are
VAT-exempt.

Hire purchase has always presented problems here as HP
receivables include the taxable price of the asset on finance, but
also VAT-exempt finance charges.

Finance companies have historically agreed special methods with
HMRC on input tax recovery ratios for HP overhead costs.

However, there has been pressure to get rid of even the 15
percent rate, including after the move by the FLA to withdraw its
endorsement of this recovery.

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Lombard justifies its claim to increase the tax recovery to 50
percent on the basis that each HP transaction comprises two deals,
implicitly of equal value, for the sale of goods and for the
finance.

A VAT tribunal originally ruled in Lombard’s favour, but this
ruling was overturned by the Scottish Court of Session on August 21
this year.

The latter made this ruling on the basis that the earlier
tribunal had not adequately explained why the 50 percent rate was
fair and reasonable. The appeal judges implied any sustainable
special method should be based on a more systematic attribution of
costs than the transaction count basis argued by Lombard.

Andy Thompson