The companies successfully argued that they should only account for output VAT on the money they actually receive from a customer. Prior to this, manufacturers have accounted for output VAT on the original sale price of a product, regardless of any future cashback payments which reduce this price. For example, if a manufacturer sold a car for £10,000 + VAT (£11,750) to a dealer, the manufacturer would pay the VAT sum of £1,750 to Customs & Excise. The dealership buying the car would recover the VAT charged (£1,750), but then charge VAT on the final sale price of the vehicle to the end customer, who could not recover any VAT. Any cashback would then be paid directly by the manufacturer to the end customer.
Following the European Court's ruling, if the manufacturer offers a £500 cashback, for example, it is now only liable for VAT on £11,750 minus £500, ie £11,250, which would make its output VAT liability £1676.53, a saving of £74.46. This means the cashback has cost it £500 minus £74.46 (£425.54), although the end customer would still receive £500.