The VAT treatment of PCP agreements for commercial vehicles

When considering the purchase a commercial vehicle, there are many decisions to make, including whether a hire purchase (HP) agreement or a personal contract purchase (PCP) agreement is more suitable, but what are the VAT implications of a PCP agreement?

With an increase in the different types of financing available for the purchase of vehicles, more people are now questioning which option is the best for their circumstances.

Defining the type of agreement

HM Revenue & Customs (HMRC) differentiates between the supply of goods, such as a HP agreement, and a supply of services. Essentially, a HP agreement considers that the title will pass at the end of the agreement, but a lease agreement, such as those with large balloon payments, may end with the lessee leaving the agreement.

The significance of the difference between a supply of goods and a supply of service is the timing of VAT recovery.

The VAT treatment of agreements

In the case of a supply of goods, the VAT is chargeable and, as a result, recoverable, from the beginning, with the VAT finance agreement showing the VAT as a lump sum that is payable upfront, and any monthly finance payment should, therefore, be net of any VAT.

However, in a supply of leasing services, the VAT is chargeable and recoverable on each payment, and this means that a VAT schedule should be provided by the finance company in which the payments are detailed.

But how do the rules apply for PCP agreements?

Following a court case involving Mercedes Benz Financial Services, the HMRC guidance was updated and a new brief issued.

As a result, the VAT treatment of PCP contracts will be dependent on the level at which the final optional payment is set:

  • If at the start of the contract, the payment is set below the anticipated market value, then the agreement is a supply of goods in full at the outset and the finance is exempt from VAT
  • If at the start of the contract, the payment is set either at or above the anticipated market value of the goods, then the agreement is a supply of leasing with VAT on each instalment.

For help and advice on matters relating to VAT and commercial vehicles, contact our expert team today.