In the first case of its kind to reach tribunal, top 10 group Camden Motors successfully resisted Her Majesty's Revenue & Customs' challenge to the current system of VAT recovery.

HMRC had opposed motor retailers' method of calculating how much VAT relates to exempt income, saying it should not be recoverable. It said dealer groups should consider only the level of profit, rather than income, made by the exempt activities and compare it to profit generated from other activities.

Because margins on finance and insurance are typically much higher than those achieved on selling cars, HMRC said car retailers should be far more restricted on the level of VAT they can reclaim. “This is a very important decision for Camden and the motor retail sector as a whole,” said David Raistrick, automotive partner at Deloitte & Touche global manufacturing industry group. “If HMRC were to be successful with this approach it would cost the motor retail sector millions of pounds at a time when it can little afford it.” The system currently in place states that VAT can only be recovered when the purchased items are to be used to make an onward supply that is subject to VAT. Retailers have traditionally made this calculation by comparing how much of their income is subject to VAT to VAT-exempt income from finance and insurance. Despite the successful tribunal ruling, Deloitte and Touche warned that the matter may not yet be resolved, as HMRC may appeal to a higher court.