Major VAT Changes ahead for Motor Finance

06 June 2017

In a case which is being closely followed by the Motor Finance sector, the Advocate General to the Court of Justice in Luxembourg has released his opinion on whether the Mercedes-Benz ‘Agility’product constitutes a supply of goods or services.

Although this may sound like a very esoteric argument, if the Court follows the Advocate General’s opinion, then finance houses could see significant cash flow improvements on Personal Contract Purchase (PCP) type arrangements. 

When buying a car using PCP a customer pays a deposit and makes monthly payments, but title does not pass unless/until the customer makes all payments including a relatively large balloon payment at the end.  The balloon is set at a level equivalent to the vehicles’ estimated residual value at the end of the term. Crucially there is no inevitability about the transfer of ownership, with many customers simply choosing to hand a car back rather than make the balloon payment.

Under current HMRC interpretation, the supply of a vehicle under PCP is treated as a supply of goods for VAT purposes. This means that the finance company must account for VAT in full at the time a car is driven away by a customer, even though only a small proportion of the price will have been paid at that time.

Mercedes-Benz have challenged this view, arguing that a supply of goods is one where title is expected to pass in the normal course of events, such as in traditional HP agreements with small final instalments. The Advocate General only advises the Court, but he has supported Mercedes-Benz’ view that Agility (a PCP-type contract) is for a supply of services. If the Court agrees, VAT will only be due on each payment made by the customer rather than on the whole value of the car at commencement of the contract. This is potentially a major boost to finance companies, both in terms of cash flow and in an absolute reduction of VAT due where a customer does not decide to take ownership at the end of the term. In addition, there may well be opportunities for VAT reclaims to be made for VAT overdeclared over the past 4 years.

In VAT terms, the outcome of this case could bring PCP in line with purchase contract hire – a less common arrangement where a customer is not given the automatic right to buy the vehicle at the end of the contract. It is right that it should do so, as the commercial reality is that many customers make a choice to acquire a vehicle using PCP on the basis of affordable monthly payments rather than with any intention to buy a car outright.

Any business which believes it may be able to make a valid claim is invited to contact Glyn Edwards, VAT Director at MHA MacIntytre Hudson.

Get in touch with our expertsEnquire now