case alert - mercedes-benz financial services uk ltd
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GRT100456
SummaryThe VAT rules for dealing with the
‘time of supply’ are complex and are
different depending on whether what is
being supplied is a supply of services or
of goods.
Mercedes-Benz Financial Services UK
Ltd supplies motor cars to customers
on various finance deals. One such
package is the ‘Agility’ deal whereby the
customer will lease the vehicle for a
specific period and will pay agreed
monthly instalments. At the end of the
lease term, the customer has an option
to purchase the vehicle by payment of a
final ‘balloon’ payment which may
represent anywhere between 40% and
50% of the vehicle’s cost price.
HMRC considers that cars sold in this
way are supplies of goods and, thus,
VAT is due on the full selling price at
the outset of the contract. MBFS
consider that the Agility model
constitutes a supply of services with
VAT due only on each instalment.
04 October 2017
Court of Justice Judgment Mercedes-Benz Financial Services UK Ltd (MBFS)
In a fairly short judgment issued on 4 October 2017, the Court of Justice has ruled that when a car is leased to a customer and the contract provides the customer with an option to purchase the vehicle on payment of a substantial balloon payment, that supply constitutes a supply of services and not a supply of goods.
HMRC has always been of the view that, as such contracts anticipate that, at some point in the future, the customer could (if he chooses to exercise the option) acquire ownership of the vehicle, that the supply constituted a supply of goods. HMRC based its stance on the fact that the wording of the VAT Directive which governs the operation of VAT throughout the EU was quite ambiguous. Article 14(1)(b) of the Directive specifically stipulates that there is a supply of goods where the goods are handed over pursuant to a contract for hire for a certain period but which provides that, in the normal course of events, ownership is to pass (to the customer) at the latest upon payment of the final instalment. HMRC took this to mean that even in cases where the customer did not exercise the Agility option, nevertheless, the opportunity to acquire the vehicle existed if a final balloon payment was made.
The CJEU has followed the reasoning of the Advocate General in his earlier opinion and has ruled that the term ‘ in the normal course of events’ must be interpreted as meaning that for their to be a supply of goods, the customer must have paid substantially the full amount due for the vehicle such that it would be a nonsense (from an economic standpoint) not to acquire it (this being a matter for National courts to determine). MBFS customers may have up to 40% of the vehicles cost price to pay at the end of the hire term and, in such circumstances there would be no economic imperative to acquire title. As such, that is not a supply of goods, but is a supply of services.
Comment – the Court’s ruling confirms supplies of vehicles in these (or similar) circumstances are to be treated as the supply of services. The tax point being the issue of an invoice for or the receipt of each instalment payment (whichever occurs first). The judgment means that finance companies (such as MBFS here), should be entitled to reclaim VAT already accounted for up front and to pay the balance over the term of the lease.
VAT Victory for Mercedes Benz FSCJEU judgment considers ‘Agility’ contract is a supply of services not goods
Case Alert
ContactStuart Brodie Scotland [email protected] (0)14 1223 0683
Karen Robb London & South East [email protected] (0)20 772 82556
Vinny
McCullagh
London & South East [email protected] (0)20 7383 5100