HMRC’s new policy on the VAT treatment of personal contract purchases (PCP) and similar contracts has come into effect.
Recently issued guidance explains that supplies which have in the past been regarded as supplies of goods and also a separate supply of credit, will now in certain cases be deemed a single supply of taxable leasing services.
Businesses must adopt the correct treatment for all new contracts no later than 1st June 2019.
What are PCP contracts?
PCP or similar contracts allow the customer to pay a series of lease payments and then make a choice as to whether to pay a substantive payment to acquire the asset. A typical example involves choosing to purchase a car or to return it at the end of the hire period without making the substantive payment.
This change in practice reflects the Court of Justice of the European Union’s (CJEU) decision in Mercedes-Benz Financial Services UK (MBFS) (Case C-164/16).
Background to the case
The issue in the case was whether the correct VAT treatment had been applied to MBFS’s PCP car finance scheme (Agility); specifically, if the contract was a supply of goods or of services. If deemed a supply of goods, the full amount of VAT on the value of the car would be due at the start of the contract and the finance would be VAT-exempt. On the other hand, if it were deemed a supply of services, VAT would be due incrementally on each payment instalment received.
Correct VAT treatment
The CJEU determined that if at the start of the contract its value 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 be a supply of leasing services from the outset.
However, if at the start of the contract it is set below the anticipated market value such that a rational customer would buy the asset it is a supply of goods with a separate supply of finance.
Businesses impacted by this development may need to make adjustments to their input VAT if the proportion of taxable to exempt supplies has changed.