HMRC change policy on VAT treatment of Personal Contract Purchases (PCP) following CJEU decision
carolineheath 6 March 2019 No comments
HMRC have issued Revenue and Customs Brief 1(2019): Change to the VAT treatment of Personal Contract Purchases which explains a change in policy following the European Court of Justice (CJEU) decision in Mercedes Benz Financial Services C-164/16 (MBFS).
Previously HMRC regarded supplies made under such contracts as supplies of goods and a separate supply of credit. Following the MBFS decision it now considers that some of these contracts are a single supply of taxable leasing services.
The Brief explains the circumstances when contracts must be treated as a supply of leasing services, the date from when the change in treatment must be applied, and what businesses must do to correct past periods where necessary.
What was the MBFS case about?
The case concerned the VAT treatment of a specific motor vehicle finance agreement called Agility. MBFS also offers traditional hire purchase finance arrangements which are recommended for customers who want to purchase the vehicle, and an ordinary leasing product for those that do not. The Agility product is intended for those customers who are undecided as to whether they want to ultimately own the car or want to keep open the option of whether to purchase it or not.
MBFS took the view that Agility was a rental agreement with an option to purchase, and therefore treated its supplies as services for VAT purposes. HMRC disagreed on the basis that because there is the possibility that title to the goods would pass, there is a supply of goods.
If the supply is one of services VAT is due at the time of payment of each instalment. If the supply is one of goods then VAT is due in full up front on the value of the car and there is a VAT exempt finance charge.
What did the CJEU decide?
The CJEU concluded that a judgment must be made by the supplier at the outset of the contract as to what the customer, acting as a rational economic actor, would do when entitled to exercise a purchase option. If the customer could profitably sell the asset for more than the cost of the final optional payment, then if they act rationally it can be expected that they will buy the asset.
However if the optional payment is expected to be the approximate open market value of the asset at the time the option must be exercised, then the customer may equally choose to purchase the asset, or return it and so it cannot be expected at the outset that they will buy the asset. When considering this choice, additional circumstances that might impact individual decisions to purchase or not, such as access to funds, should not be taken into account.
HMRC policy on the correct VAT treatment
The Brief states that the correct treatment of PCP and similar contracts depends on the level at which the final optional payment is set:
- if, at the start of the contract, it is set at or above the anticipated market value of the goods at the time the option is to be exercised, the VAT treatment of the contract will follow the MBFS judgment. It is a supply of leasing services from the outset and VAT must be accounted for on the full value of each instalment, there is no advance, or credit, so there is no finance
- if, at the start of the contract, it is set below the anticipated market value, such that a rational customer would buy the asset when they exercise the option, it is a supply of goods, with a separate supply of finance. VAT is due on the supply of goods in full at the outset of the contract, the finance is exempt from VAT
HMRC will generally accept that the optional payment is set below the anticipated market value if it is below the value expected based on historical depreciation rates in immediately preceding years for the same or similar assets, such as the same model of car.
Businesses may use another method to establish the anticipated open market value of the asset, providing it produces a credible assessment of future value, given information available at the time the assessment is made.
Businesses must adopt the correct treatment for all new contracts no later than 1 June 2019.
Past errors must also be corrected and the Brief outlines what action should be taken by businesses that have:
- treated their PCP supplies with a final optional payment at or above open market value as goods
- treated their PCP supplies with a final payment at or above market value as services, but have incorrectly treated an element of each instalment payment as exempt finance
- treated their PCP supplies with a final payment below market value as services and have accounted for VAT on all or part of the instalment payments.
Amendments to input VAT treatment
Businesses may need to make adjustments to their input tax claims where the proportion of taxable and exempt supplies changes as a result of making corrections for past errors. These should be made at the same time as any adjustments to output tax are made.
Please get in touch with us if you think this change in HMRC policy affects your business and you require assistance implementing the new VAT treatment or calculating corrections for past errors.