Leasing companies providing fleets with cars and vans have been told they must not manipulate financial and insurance packages to avoid charging their customers VAT.
In a complex Italian case involving a company now in liquidation - Part Service, formerly Italservice - the European Court of Justice (ECJ) ruled that leasing companies cannot artificially split supplementary services from their core leasing business simply to avoid charging VAT on them.
The Italian company had attempted to do just that, but was taken to the ECJ by the Italian government.
The ruling means leasing companies offering ancillary services, such as insurance, cannot split these products from their core leasing service when calculating VAT charges.
Such a move would be “abusive practice” under the European Union’s sixth VAT directive 77/338/EEC “when the accrual of a tax advantage constitutes the principal aim of the transaction,” said the court ruling.
In other words, if the primary goal of splitting products is solely to reduce a customer’s tax liability, it is illegal.
However, where there is a clear split, such as a third party being contracted to offer financing, brokering and insurance services, then a restriction of VAT to just leasing could be justified, said the ECJ.
The European court has said it is still down to national courts to decide on a case-by-case basis whether the circumstances of such VAT manoeuvres were an abusive or not.
In this instance, Italservice had structured its financing and insurance services with a sister company IFIM Leasing.