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VAT change to Vehicle Finance Agreements – Mercedes-Benz Financial Services UK Ltd

This decision, released in October 2017, related to the VAT treatment of the Agility finance agreement.  This type of agreement appears to sit in between the more traditional hire purchase (where the customer wants to purchase the vehicle) and the vehicle lease (where the customer does not want to purchase the vehicle).  The Agility agreement is a rental agreement but with an option to purchase.  The taxpayer was of the opinion that this was a supply of services and therefore VAT was due with each payment whereas HMRC stated it was a supply of goods and VAT was due upfront.

The CJEU agreed with the taxpayer that the agreement constituted a supply of services and VAT was due on each monthly payment.  Whilst the decision relates specifically to Mercedes-Benz Financial Services UK Ltd, this decision will apply to other providers offering similar finance agreements.  The main point is that the agreement must show that it is unclear whether there would be a transfer of ownership and there must be no clauses in the contract insinuating that there will be a guaranteed transfer of ownership.

Where a VAT registered business has entered into an Agility agreement (or similar with a  different provider) they would not have been able to reclaim any VAT as this type of agreement was seen as a sale of the vehicle and taxpayers cannot reclaim VAT on the purchase of cars.  However as this arrangement is now seen to be the lease of a vehicle it falls under different rules.  Therefore a business with this arrangement is entitled to claim 50% of the VAT incurred on the lease costs (subject to the normal input tax rules).

If you believe you have one of these arrangements we recommend that you speak to your provider to assess whether you are due a refund of VAT initially paid on the vehicle.

For further information please contact Alison Birch below:

Written April 2018.

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