The Scottish group originally paid the money, which it received for vehicles used for contract hire and daily rental, in line with Customs’ policy at the time.
Historically, leasing companies paid VAT on the price of the car (input tax) and on the bonus payment (output tax). However, the output payment has been ruled as incorrect by the European Court of Justice.
Originally HMRC refused to refund the money to Arnold Clark on the basis that the group had effectively passed the VAT charge back to the carmakers and would therefore be unjustly enriched by any refund.
But a tribunal in Scotland ruled that Arnold Clark paid too much output tax on the bonuses, and had too much input tax blocked on the purchase of the cars (as it was based on gross, not net, price after the deduction of the bonus).
Arnold Clark’s claim was for the amount of input tax that should not have been blocked.
David Raistrick, automotive partner at Deloitte, which assisted Arnold Clark, says: “We believe that the ramifications of this decision could be far-reaching and may open the door for other taxpayers who have been unfairly denied VAT refunds due to them.”