Revenue and Customs Brief 1(2019) - treatment of personal contract purchases
Submit Articles Back to Articles
Published 27 February 2019
purpose of this brief
To advise businesses how to treat personal contract purchases (PCP) and similar contracts
following the European Court of Justice (CJEU) decision in Mercedes
Benz Financial Services (MBFS).
Previously HMRC regarded supplies made under such contracts as supplies
of goods and a separate supply of credit. Following the MBFS decision we now
consider that some of these contracts are a single supply of taxable
This brief explains the circumstances where these contracts must be
treated as a supply of leasing services, the date from when the change
in treatment must be applied, and how to correct past periods where
2. Who should read this brief
You should read this brief if you make supplies using PCP or similar contracts. By
similar contracts we mean contracts that provide for the customer to
pay a series of lease payments and then make a choice whether to pay a
substantive payment to acquire the asset, or to return the asset at the
end of a period of hire without making the substantive payment.
MBFS and HMRC
litigated about the correct VAT treatment of MBFS’s PCP finance scheme called
‘Agility’. The case proceeded to the Court of Appeal (CoA)
which made a
reference to the CJEU
to determine how the phrase “normal course of events” in
of the Principal VAT Directive should be interpreted.
In October 2017 the CJEU
gave its ruling and HMRC subsequently withdrew its appeal.
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
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.
4. Hire Purchase (HP)
with a balloon payment
Many businesses offer HP
contracts where the final instalment is a substantive amount
payments), similar to those in PCP
contracts, however the final instalment is not optional under HP contracts. Such agreements normally
have a much lower option fee to acquire the asset which is payable
immediately after (effectively at the same time as) the balloon
payment. Where the option fee is clearly below the anticipated market
value of the asset these supplies are not affected by the MBFS ruling,
regardless of the level at which the balloon payment is set.
5. Correct treatment
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
Businesses must maintain, as part of their business and accounting
records, evidence which demonstrates how they have arrived at the
figures they have used.
Businesses must adopt the correct treatment for all new contracts no
later than 1 June 2019.
Correcting past VAT periods
6.1 Businesses which have treated their PCP or similar supplies as
have set the final optional payment at or above open market value
This is an error as the supply is one of services. However if VAT
has been accounted for in full up front on the goods supplied under
those contracts businesses need not revisit their VAT accounting.
Alternatively they may choose to correct the VAT they have
overcharged to date. They must not adjust for the VAT that has already
fallen due and must account for VAT on future instalments, as they
Adjustments must be made using the normal error correction
procedure. Information on error corrections can be found in Notice
700/45: how to correct errors and make adjustments or claims.
have set the final optional payment below open market value
Businesses that have accounted for the full amount of VAT at the
outset of contracts have treated the supplies correctly and no changes
to their VAT accounting are required.
6.2 Businesses which have treated their PCP or similar supplies as
set the value of the final payment at or above the anticipated open
market value of the goods at the time the option is due to be
exercised, and have erred by treating an element of each instalment as
Businesses must account for the VAT due on the element they have
incorrectly treated as finance by following the normal error correction
process as explained in Notice 700/45
Alternatively, if they so choose businesses may treat all such
supplies as though they were supplies of goods, and only adopt the
revised treatment for all new contracts from a future date but not
later than the 1 June 2019. They must use the VAT error correction
procedure to declare the VAT due on the goods in full in the VAT period
covering the beginning of the contract, offsetting any VAT they
accounted for on instalment payments they have received.
set the value of the final payment below the anticipated open market
value of the asset at the time the option is due to be exercised; and
treated the supply as one of leasing services and accounted for VAT on
all or part of the instalments
Businesses must correct the error, following the normal error
correction process as explained in Notice 700/45, by declaring the VAT
due on the goods in full in the VAT period covering the beginning of
the contract, offsetting any VAT they incorrectly accounted for on
instalment payments they have received.
7. Previously submitted Error Correction
If businesses have not treated their supplies in line with the
judgment on their VAT returns, but have put in error correction notices
(ECN) showing the VAT
they considered would be due if HMRC’s appeal failed:
- HMRC will ask claimants how they calculated the final payment
- those that have set the value of the final payment below the
anticipated open market value of the goods at the time the option is
due will have their ECN
rejected by HMRC
- those that have set the value of the substantive payment at or
above open market value must, if they have accounted for VAT on only
part of the instalment payments received, submit a further ECN to account for the
difference between the VAT they have accounted for and the VAT due on
the full instalment payments received
- alternatively they may withdraw the ECNs and treat the supplies
as goods. They must adopt the correct treatment (as described above)
for all new contracts from a future date commencing no later than 1
8. Input tax
Businesses may need to make adjustments to their input tax where the
proportion of taxable and exempt supplies they have made changes. These
should be made at the same time as any adjustments to output tax, by
following the normal error correction procedures.
9. Customers that have recovered VAT on PCP contracts
Customers that have recovered VAT on PCP contracts which their
supplier amends in the light of the MBFS judgement must
adjust their claim accordingly.
10. HMRC VAT Guidance
Our internal guidance, VAT SC72600; VATTOS9250; VATFIN3120 and
section 4 of VAT Notice 701/49: finance, have been amended to reflect
About the Author
© Crown Copyright 2019.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
Follow us @Scopulus_News
Article Published/Sorted/Amended on Scopulus 2019-01-27 20:00:00 in Tax Articles