Judy Harrison and Leyla Cooper explain how a key decision has important implications for VAT.
The First-tier Tribunal has held that a contract purchase agreement which gave customers the use of a vehicle for the life of the contract and the option of either purchasing or returning the vehicle at the end of the agreement was a supply of goods rather than a supply of services in Mercedes-Benz Financial Services (UKFTT 381).
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The price at which the customer could acquire the car was a pre-estimate of the car’s market value at expiry of the contract.
Whether a contract is a supply of goods rather than services is significant because it affects whether VAT is payable upfront (on a sale of goods) or over time (for a supply of services); and in cross-border transactions, determines which jurisdiction has the right to impose VAT (in the case of a goods, VAT is typically imposed where the goods are located while for services it is typically where the lessee is based).
Following the decision in Eon Aset, HMRC has been considering whether to change its long-held view that leases are supplies of services (see Is a lease a service or a good? LL 234, March 2013)
This case revolved around the interpretation of the language in the VAT directive which provides that an agreement is a supply of goods, where "in the normal course of events, ownership is to pass at the latest upon payment of the final instalment".
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By GlobalDataThe Tribunal held that this language is concerned with the terms of the contract, not the probability that title would actually be transferred.
As a result, the question was whether the passing of ownership was "normal under the terms of the contract" rather than "abnormal".
The Tribunal noted a number of compelling factors which were indicators of the contract being for the sale of a car.
In particular, the contract described itself as a hire purchase contract, provided for the payment of a deposit, contained financial information (including the price paid for the car), a substantial cash payment was inherent in the structure and the contract contained a purchase option.
The Tribunal held that on a proper analysis, the sole realistic option for a customer was to purchase the vehicle, and the fact that ownership might not transfer under the contract did not preclude it from being a contract for sale.
The Mercedes-Benz decision indicates that where a lease has a purchase option, it will be important to consider whether it should be classified as a supply of goods or services.
It is also interesting to contrast the position of HMRC with respect to the significance of the market value purchase option in the context of Section 67 of the Capital Allowances Act 2001. Here it argued that a market value purchase option was one under which in the normal course of events, ownership would pass.
For capital allowances, HMRC’s view is that a market value purchase option will not result in the contract being a section 67 contract, and ownership for capital allowance purposes does not sit with the hirer.
Judy Harrison is a senior associate and Leyla Cooper an associate with Norton Rose Fulbright
