In HMRC v Mercedes-Benz Financial Services UK Ltd [2017] C-164/16, the Court of Justice for the European Union (CJEU) have issued a preliminary ruling, finding that the ‘Agility’ Personal Contract Plan (PCP) could be a supply of services and VAT may not payable at the outset in full.

PCPs have become a popular way of finance the purchase of a new car or van in recent years. They allow a purchaser to effectively finance the depreciating value of the vehicle and at the end of the agreement either hand the car back or make the final (normally substantial) finance option payment.

There has been some uncertainty as to how a car purchased under a PCP should be treated for VAT.

Until now, it was widely accepted that it is treated in the same way as a Hire Purchase agreement, i.e. that VAT is payable by the seller and recoverable (for Vans or commercial vehicles) in full at the outset.

The time of supply depends on whether it is a supply of goods or a supply of services.

Under EU law, a supply of goods includes “the actual handing over of goods pursuant to a contract for the hire of goods for a certain period… which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment”.

In this case:

  • Mercedes-Benz Financial Services (MBFS) offer the ‘Agility’ PCP as well as Hire Purchase and Leases.
  • MBFS take the view that the PCP is a supply of services, not a supply of goods.
  • HMRC take the view that the PCP is a supply of goods, the same as an HP.
  • Whether it is a supply of goods or services will impact on the time of supply:
    • If it is a supply of services, VAT is payable on each monthly payment in this case.
    • If it is a supply of goods, VAT is payable at the outset as MBFS cannot use cash accounting.

The First-Tier Tribunal found in favour of HMRC, but this was overturned by the Upper Tribunal. HMRC appealed to the Court of Appeal who referred the case to the European Court, in particular asking whether the phrase “in the normal course of events” in EU supply of goods law, requires more than just an option to purchase.

The CJEU have determined that the PCP contract, with an option to purchase can be a supply of goods, but only if exercising that option appears to be the only economically rational choice that the less will be able to make at the appropriate time.

They have referred the case back to the Court of Appeal and stated that each case will be dependent on the facts and national courts will need to judge on a case by case basis whether the conditions will be met.

It is considered likely that this will mean a PCP will be a supply of services as the final optional payment is a substantial amount, and the other options, handing back the vehicle or refinancing, mean that exercising the option is not the "only economically rational choice that can be made if the contract is performed for its full term".


Car or Van for VAT?

Time of supply

Goods or services for VAT?

External link: CJEU judgement C-164/16



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