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Working out VAT for PCPs

26th Apr 2022
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It is more than three years since HMRC issued Brief 1/2019 explaining their revised approach following the European Court decision in Mercedes Benz Financial Services [2018] STC 1190. You can find the decision here:   www.bailii.org/eu/cases/EUECJ/2017/C16416.html

The underlying VAT question is whether, at the outset of the agreement, the supply is one of goods or of services. This follows from the wording of VAT Act 1994, Sch 4, para 1(2)(b), which reads:

“(2)     If the possession of goods is transferred—

(a)     …

(b)     under agreements which expressly contemplate that the property also will pass at some time in the future (determined by, or ascertainable from, the agreements but in any case not later than when the goods are fully paid for),

it is then in either case a supply of the goods.”

Para 5 of the Brief states that “the correct treatment of PCP and similar contracts depends on the level at which the final optional payment is set.” This is NOT “the correct treatment”! It is HMRC’s application of the ECJ decision in MBFS. Arguably it is not consistent either with the ECJ decision or the VAT Act.

Even so, providers of finance should be aware of HMRC’s position. The key is the quantum of the final optional payment. The logic then follows:

  • If the final payment is set at or above the anticipated market value, then the customer would not be expected to retain the vehicle. This is therefore treated as a supply of services. VAT is due on the periodic payments.
  • If the final payment is set below the anticipated market value, then the customer would be expected to purchase the vehicle. This is therefore a supply of goods. VAT is due on the value of the vehicle at the commencement of the agreement. The finance charge is exempt from VAT. 

If you are ‘purchasing’ a vehicle under such arrangements, take care that you understand the implications in relation to input tax.

For a supply of services, in most instances a 50% input tax block applies to the hire of cars. No such block applies to the hire of commercial vehicles. For a supply of goods, in most instances input tax cannot be claimed on the purchase of a car. But input tax is more often recoverable on the purchase of commercial vehicles.

This is a link to the Brief:  www.gov.uk/government/publications/revenue-and-customs-brief-1-2019-change-to-the-vat-treatment-of-personal-contract-purchases 

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