Further to my article on the Mercedes Benz Financial Services (MBFS) case on Personal Contract Purchase (PCP), HMRC has published a Briefing Note – Changes to the VAT treatment of PCPs
HMRC has fully implemented the findings in the MBFS CJEU case. In summary, HMRC state that:
“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 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”
This treatment must be used by 1 June 2019. Past declarations which have been in error must be adjusted per PN 700/45. Businesses affected by the changes may also need to consider adjustments to input tax claimed, or forgone in respect of partial exemption. A guide to partial exemption here.