HMRC v Mercedes Benz Financial Services – CJEU clarifies test on nature of supply of leasing contracts with option to purchase
The facts of the case concerned a certain type of motor vehicle finance agreement, called an “Agility Agreement”, under which the customer, having paid monthly instalments in exchange for using the vehicle for a specific period, had an option to purchase the vehicle in consideration for a “balloon” payment of approximately 40 per cent of the vehicle sale price, including the cost of financing. The issue is whether these are contracts for a supply of services (with VAT chargeable on each monthly instalment) or a supply of goods (VAT chargeable up front).
From an EU law perspective, this question turns on the interpretation of Article 14(2)(b) of the VAT Directive, which specifies that there is a supply of goods in the case of agreement where there is “the actual handling over of goods pursuant to a contract for the hire of goods for a certain period, or for the sale of goods on deferred terms, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment” (emphasis added).
In its judgment the CJEU has given guidance to national court on the application of the above three-stage test: Article 14(2)(b) applies to leasing contracts with an option to purchase (i.e., an express ownership transfer clause) if it can be inferred from the financial terms of the contract that exercising the option appears to be “the only economically rational choice that the lessee will be able to make at the appropriate time if the contract is performed for its full term”. This is obviously a matter for the national court to determine, but in reaching its decision the CJEU referred back to the analysis at paragraphs 50 to 53 of the Advocate General’s opinion, and observed that this might in particular be the case where the aggregate of the contractual instalments corresponded to the market value of the goods, including the cost of financing, and the customer would not be required to pay a substantial additional sum as a result of exercising the option.
It is highly likely therefore that the Court of Appeal will find the Agility Agreement to be a supply of services, but other cases will need to be considered on their own facts.
This article appears in the JHA October 2017 Tax Newsletter, which also features:
- Littlewoods – Supreme Court Judgment: Statutory Interest Compatible with EU Law by Ibar McCarthy
- HMRC announces change in policy on VAT treatment of pension fund management services by Christopher Kientzler
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