On 27 February 2019, HMRC published advice to the motor trade concerning “personal contract purchase” agreements (“PCP’s”) – Revenue and Customs Brief 1 (2019) – change to the VAT treatment of personal contract purchases.
The advice follows on from HMRC’s decision to withdraw its appeal following the decision of the European Court of Justice in HMRC v Mercedes Benz Financial Services UK Ltd in October 2017.
The case concerned the VAT treatment of PCP’s which HMRC argued were contracts to buy vehicles and therefore required the vendor to pay the output VAT to HMRC on the full price of the car as if the car was sold. MBFS had argued that the supply of the PCP was a service and therefore VAT should only be chargeable on that.
The advice from HMRC confirms that the PCP is not a contract to purchase a car unless the anticipated market value of the PCP final payment is below the expected market value of the asset at that time (such that the customer would be expected to buy the car at the end of the contract and then subsequently make a profit).
What does it mean?
Where a business has treated a PCP contract incorrectly, as a sale of a vehicle VAT can be recovered by submitting an error correction notice. For the future HMRC require businesses to adopt the correct treatment for all new contracts by no later than 1 June 2019.
In some cases, business will need to adjust their partial exemption calculations because of the adjustments.
Mike Jones of ASE Plc commented that “the VAT treatment of motor vehicles has always been a complex subject and specialist advice is essential to ensure that businesses apply the rules correctly”.
He noted that “the adjustment to partial exemption calculations may be significant and if the reduction is turnover, with vehicle sales moving to PCP sales is significant, this could have a serious impact on the businesses ability to recover input VAT” adding that “the adoption of a Special Partial Exemption Method may be something that businesses should look into very carefully in future if they have not already done so in the past”.
Most interestingly, Mr Jones advised that “the fact that a PCP is not the sale of a car for VAT purposes may mean that the traditional method whereby the manufacturer and dealership supply vehicles to the public might be revisited”. He concluded by observing that “the development of agency sale models, which are relatively limited within the UK market, may become more prevalent in future as manufactures and dealers look to finesse the way in cars are supplied to customers. There appears little point a franchise selling a car to a dealer, only to have to take it back again when that car is ultimately sold via a PCP”.
Author: Chris Cummings