In this month’s Chartered Accountants Tax Case Digest we look at a Court of Appeal case which examined whether a specific motor vehicle finance agreement, akin to a Personal Contract Purchase (PCP) arrangement was a supply of goods or services for value added tax purposes. While this is a UK decision, it does offer some guidance on the possible interpretation of the equivalent Irish VAT legislation. However, the Court concluded that it is necessary to refer certain questions to the Court of Justice of the European Union (CJEU), hence the matter is less than final.

Background

This case concerned the treatment of a specific motor vehicle finance agreement offered by Mercedes-Benz Financial Services (“MBFS”). The PCP, ‘Agility’, is available to customers undecided as to whether they want to own the car or keep open the option of whether to buy or not.

The Agility contract is one of three financial products provided by MBFS to its customers. The other two are hire purchase (“HP”) and leasing contracts. The Agility agreement, like a HP agreement, provides for a term of 36 months with an option to purchase at the end of the term. It is regulated under the Consumer Credit Act 1974 but differs from a HP agreement in that the monthly payments are calculated by reference to the difference between the purchase price of the vehicle and its anticipated residual value at the end of the term plus interest. So, even when a customer has made all the obligatory contractual payments, a substantial amount of the original purchase price will remain unpaid.

If the customer decides at the end of the term that they do wish to exercise the option to purchase, their final monthly payment will therefore be a sum equal to the vehicle’s estimated residual value in addition to the £95 option fee. The final monthly payment (described as an Optional Purchase Payment) amounts in most cases to something in excess of 40% of the original purchase price.

If the customer decides not to exercise the option to purchase, the vehicle is disposed of by MBFS to a sister company under a guaranteed buy-back agreement which means that it takes no risk “on the metal”. As the Agility agreements are regulated agreements then the customer is given a statutory right of termination under the Consumer Credit Act. If exercised, the most that MBFS can recover from the customer is half the total amount that is payable under the agreement.

MBFS considered Agility to be a rental agreement with an option to purchase not contractually binding and, therefore, treated it as a supply of services for VAT purposes meaning output VAT was not due upfront but rather was due on receipt of each monthly payment. HMRC disagreed and considered that because there was the possibility that title to the goods would pass, the transaction was a supply of goods and thus the output VAT was due upfront.

The First Tier Tribunal found for HMRC. However, the Upper Tribunal (“UT”) disagreed, concluding that under a PCP agreement, title to the goods would not pass in the normal course of events. The appropriate VAT analysis would be to treat the sale as a supply of services with output VAT due on receipt of each monthly payment as opposed to upfront VAT at the start of the agreement on a supply of goods.

The UT focused on Article 14(2) of the VAT Directive. Noting that the contract may well lead to a sale of the vehicle but, equally, may not, the UT found for the taxpayer that there was a supply of services.

Decision

The resolution of this issue turns on the correct interpretation and application of Article 14 of the Principal VAT Directive (2006/112/EEC) (“the Directive”) which provides:

“1. ‘Supply of goods’ shall mean the transfer of the right to dispose of tangible property as owner.

2. In addition to the transaction referred to in paragraph 1, each of the following shall be regarded as a supply of goods:

1. the transfer, by order made by or in the name of a public authority or in pursuance of the law, of the ownership of property against payment of compensation;
2. the actual handing 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;
3. the transfer of goods pursuant to a contract under which commission is payable on purchase or sale.”

At the Court of Appeal, HMRC argued that the economic cause test used by the UT was the wrong tool to use and their interpretation of ‘in the normal course of events’ was incorrect.

The Court of Appeal did not give its views on each ground, but reached the view that the UT was wrong not to refer the matter to the CJEU, noting that there is little certainty as to the interpretation of the phrase “in the normal course of events”. The Court also made reference to further guidance on the economic purpose of the contract outlined by the Advocate General’s opinion in the CJEU Mirror Group case (C-409/98).

Whilst inviting the parties to liaise with the Court with a view to agreeing the questions, the Court added that it envisaged that reference to the CJEU will consider HMRC’s argument about timing. As such it was not able to reach a conclusion and it invited the parties involved to liaise with the Court with a view to agreeing the questions which will be contained in the reference.

The full judgment in this case is available from: – http://www.tribunals.gov.uk/financeandtax/Documents/decisions/