In March, HMRC issued a briefing note on changes to the VAT treatment of PCP, the conclusion of a saga following a case brought by Mercedes Benz Financial Services (MBFS) that went all the way to the Court of Justice for the European Union. Chris Marchant spoke to Simon Goldie, head of asset finance, and George Anastasi, asset finance senior policy adviser at the Finance and Leasing Association (FLA) about the effects of this decision for the market.
Giving an overview of the case, the FLA’s Simon Goldie says: “The case was based on a difference of opinion on the application of VAT. The European Court agreed with the firm that it was supply as a service.
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“At that point, HMRC had to think about what guidance it would provide the UK market. We worked with it to explain how we operate, and we also made clear that the vast majority of our members and those providing PCP in the UK were actually treating VAT as a supply of goods.”
According to the FLA, if, at the start of the contract, the optional payment 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 as a supply of services from the outset, and VAT must be accounted for on the full value of each instalment. HMRC’s view is that there is no advance or credit, so there is no finance.
If, at the start of the contract, the optional payment 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, and the finance is exempt from VAT.
As to whether the MBFS decision is going to lead to any material changes, Goldie says: “We do not think so. The guidance simply makes clear the different routes, whether supply of service or supply of goods, and firms can choose accordingly.”
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By GlobalDataGeorge Anastasi adds: “There is a little bit that dealers will have to do, such as having to review the costs of where they are setting their final payment.”
On the question of any differences in the cost of running VAT as a good or as a service, Anastasi says: “Dealers will need to think about where they are setting their final values so they can decide how they want to apply the judgement. If they already make changes as a result of the judgement, they will have to issue an error-correction notice.”
Goldie explains: “The reason for treating the financial arrangement as a good or a service reflects a funder’s business model – for example the value of the asset they are funding – and will determine when they can reclaim the VAT.”
The case in question derived from the MBFS Agility product, at its essence a form of PCP. MBFS conclusively decided it was a supply of service and the customer has a choice at the end of the agreement whether to take the asset on or not.
The case also leads to considerations for the wider market as to whether supply as a service effects the end value of the car, to which Goldie says: “The judgement on the way VAT is approached is not about that.
“The question of service or good would be determined by a rational economic decision at the beginning of the contract, so you set out what the market value of the car is at the end. If the process changes and the customer wants to keep the car, it will not matter. It is what happens at the beginning of the contract that is critical.”
