Tag Archives: court

VAT: What are zero rated animal foodstuffs?

By Marcus Ward 12 August 2019

Modelled by Lola. (R) Collar: models’ own

Latest from the courts

The First Tier Tribunal (FTT) case of Westland Horticulture Limited highlights the complexities of; the VAT treatment of food, animal foodstuffs, seeds, crops and how these are all held out for sale. One only has to consider the myriad VAT liabilities of seemingly similar products sold at, say, a garden centre, to realise that this is can be a VAT minefield.

Examples

Food for a budgerigar is standard rated, but pigeon grit is zero rated.
Peanuts and sunflower seeds are zero rated, unless advertised as wild bird food when they are standard rated
Food for a Labrador is standard rated, unless the dog is used as a gun dog when it is zero rated
Lavender seeds are zero rated. Daffodil bulbs are standard rated.

This is a very small list of examples where the VAT treatment of precisely the same product may change depending on use, and/or where a slight difference of the type of goods can have a surprising tax outcome.

A full guide to garden centre liabilities here

The case

HMRC state in Public Notice 701/38 para 5.3

“Most grass seed is zero-rated because of the extensive use of grass as animal feed. This includes supplies to and by garden centres, local authorities and grass seed to be grown on set aside land.

But pre-germinated grass seed and turf are not used for the propagation of animal feed and are therefore standard-rated.”

Zero rating is available per VAT Act 1994, Schedule 8, Group 1, item 3: “…seeds or other means of propagation of plants comprised in animal feeding stuffs”

In Westland’s case, it sold a product called Aftercut Patch Fix, which, although was 90% grass seed, also contained sowing granules and an ingredient called Clinoptilolite which, apparently, neutralises the effects of excess salts and ammonia found in pet urine. The grass seed was of various varieties and is not in itself any different to “ordinary” grass seed sold without any additives.

Having a new puppy, I can verify the damage one small hound can do to lawns and this is a product I may will need to invest in. The product was held out (see below) to help fix damage to grass that, in my case, a small Lola (and larger Libby) can do.

Decision

Unsurprisingly, the judge ruled that the product was standard rated on the grounds (no pun intended) that it was clearly intended to be used on people’s gardens rather than to be planted to grow animal food. Therefore, the zero rating provided via PN 701/38 does not apply.

The Product was physically different to generic grass seed as it contained more than just seed. The product (as distinct from the seed within the product) is therefore not a similar product to generic grass seed for the purposes of fiscal neutrality.

Commentary

A discrete issue you may think. However, the tax in this single case amounted to over half a million pounds. It illustrates how much care must be taken in establishing the correct liability of; food, animal foodstuff, pet food and ornamental versus edible plants, seeds, bulbs, shrubs and trees.

One of the salient tests is how the goods are “held out for sale” (held out)

Held out means the:

way a product is labelled, packaged, displayed, invoiced, advertised or promoted
heading under which the product is listed in a catalogue, web page or price list

In this case, the packaging and description on the appellant’s website was a major factor in the decision.

Manufacturers and retailers may need to review how their products are described, what the contents are and how they are displayed in-store. Even the location of the goods, how they are displayed, and the signage used may affect the VAT treatment (it doesn’t matter if I buy zero rated working dog food and feed it to my two who are never going to do a day’s work in their life….).

VAT: Bad Debt Relief – The Total case

By Marcus Ward 1 July 2019

Latest from the courts

Bad Debt Relief (BDR) is often an area that creates disputes with HMRC. The legislation has changed over the years and the current rules are described here.

Background

Broadly speaking, under normal VAT rules, a supplier is required to account for output tax, even if the supply has not been paid for (however, the use of cash accounting or certain retail schemes removes the problem of VAT on bad debts from the supplier). BDR, as the names suggests, is intended to provide relief on the VAT element of a bad debt. Output tax previously claimed may be “reclaimed” by using the BDR mechanism.

The law which governs the claiming of bad debt relief is The VAT Act 1994, Section 36, and Section 26A which covers the repayment of input tax when a customer fails to pay for supplies received within six months of the relevant date, and The VAT Regulations 1995, Parts XIX, XIXA and XIXB.

Conditions for claiming bad debt relief

A business must have accounted for the VAT on the supplies and paid it to HMRC
It must have been written off the debt in its day to day VAT accounts and transferred it to a separate bad debt account
The value of the supply must not be more than the customary selling price
The debt must not have been paid, sold or factored under a valid legal assignment
The debt must have remained unpaid for a period of six months after the date of the supply

The case

In the First Tier Tribunal (FTT) case of Total Catering Equipment Ltd [2019] TC 07184, heard on 4 June 2019, the issue was whether payments from customers which were diverted by a dishonest employee should be recognised as a payment for a supply of goods (no BDR available as the money was received then stolen) or whether the fact that the business did not actually receive the payment meant that a BDR was appropriate. Total supplied goods to customers, some of whom paid by credit or debit cards. The member of staff responsible for these transactions, set up a separate (from the business) bank account and fraudulently diverted customers; payments into his own account. A BDR claim was made by the appellant when the crime was discovered. The claim was refused by HMRC on the grounds that the employee had received payment “on behalf” of Total before making payment into his own account.

Decision

The judge found for the appellant. The appeal was allowed – it was decided that Total had never actually received payment for the goods supplied, so BDR was available. A distinction was made between the diversion of monies in this case (where the supplier was deemed to never had received the money) and a theft by an employee from, eg; a till or subsequent withdrawals from the business’ bank account (where a business would have received payment before the money was stolen).

Commentary

I have written about VAT and illegal activities here. There can be a fine line between taxable illegal activities and non-taxable illegal activities, and subtleties around tax points (time of supply) misrepresentation and consideration. If you, or your clients have been in the unfortunate position of being on the receiving end of crime, it would be adding insult to injury to have to account for tax on money you do not have. I would always advise that any demands from HMRC, or refusals to refund VAT should be properly reviewed.

VAT: When is the building of a house complete? (And why is it important?)

By Marcus Ward 11 June 2019

Completion of a residential dwelling

A technical point which comes up surprisingly often and seems innocuous is: when is a building “complete”? The following case is helpful, and I thank Les Howard for bringing it to my attention.

The date that the construction of a dwelling is deemed to be complete is important for a number of reasons. The issue in the case of Mr and Mrs James was whether certain works could be zero rated via the VAT Act Schedule 8 Group 5 Item 2 (The supply in the course of the construction of a building designed as a dwelling…) or as HMRC contended, they were the reconstruction or alteration of an existing building and the work should be standard rated.

Background

The James used a contractor to plaster the entire interior of their house in the course of its construction. However, the work was demonstrably defective to such an extent that the James commenced legal proceedings. A surveyor advised that all of the old plaster needed to be hacked off and replaced by new plastering installed by a new firm. The stripping out and replacement works took place after the Certificate of Completion had been issued.

The James claimed input tax on the house construction via the DIY Housebuilders’ Scheme.

Technical

HMRC refused the James’ claim to have the remedial work zero-rated because, in their view, the re-plastering works amounted to the reconstruction or alteration of the house which was, when the supplies were made, an “existing building”. They proffered Note 16 of Schedule 5 which provides that “the construction of a building” does not include “(a) … the conversion, reconstruction or alteration of an existing building”.

They stated that zero-rating only applied if the work formed part of the construction of a zero-rated building. They had previously decided that the work of snagging or correction of faults carried out after the building had been completed could only be zero-rated if it was carried out by the original contractors and correction of faults formed part of the building contract. When the snagging is carried out by a different contractor, the work is to an existing building and does not qualify for zero rating.

The James stated that the Customs’ guidelines on snagging do not take into account extraordinary circumstances. Their contention was that the re-plastering works were zero rated because they had no choice but to engage the services of a different contractor other than the one who carried out the original works.

Decision

The judge found for the appellant – the re-plastering works were zero rated.

There was a query as to why The James applied for a Certificate of Completion before the plastering was completed. In nearly all cases such a certificate would crystallise the date the building was complete.

The reasons were given as:

the need for funds. The James could not remortgage the house without the certificate and they needed to borrow a substantial amount
they could not reclaim VAT under the DIY Housebuilders’ Scheme until the Certificate of Completion had been issued
they were aware that the building inspector was beginning to wonder why the building works were taking such a long time
they needed the house assessed for Council Tax which could only happen when the certificate had been issued
the Certificate was issued as part of the procedure required by the Building Act 1984 and the Building Regulations of 2000

These reasons were accepted by the judge.

Despite the respondents stating that:

for the reasons given above
the fact that the James had been living in the house for some time
they had obtained the Certificate of Completion
the new plastering work had been done by the new plasterer such that the house had been constructed before supply of the new plasterer’s services had been made
the house was an “existing building”

the judge was satisfied that in the circumstances the new plastering work was supplied in the course of the construction of the building as a dwelling house and that there was no reconstruction or alteration of an existing building in the sense contemplated by Note (16) to Group 5 Schedule 8.

He observed that the Certificate of Completion records that the substantive requirements of the Building Regulations have been satisfied. But to the naked eye the old plasterwork was obviously inadequate and dangerous ad he could not possibly consider that the construction project had finished until the new plasterwork was installed. The James’ construction project was to build a new dwelling house. Plasterwork of an acceptable standard was an integral part of the construction works. The new plasterwork was done at the earliest practicable opportunity.

Commentary

Care should be taken when considering when the completion of a house build takes place. There are time limits for DIY Housebuilders’ Scheme clams and clearly, as this case illustrates, usually work done to a house after completion does not qualify for zero rating. So, if the owner of a house is thinking of, say, building a conservatory for example, it is more prudent in VAT terms to construct it at the same time as a new house is built, and certainly before completion.

I would say that the appellant in this case achieved a surprisingly good result.

VAT: Zero rating of prescriptions

By Marcus Ward 29 April 2019

Latest from the courts

The UK is unique in the EU for the zero rating of medicines prescribed by a registered medical practitioner.

In the First Tier Tribunal (FTT) case of Pearl Chemist Ltd (Pearl) the issue was whether the development of new technology and legislation affected the zero rating of prescriptions written by UK registered and non-UK registered doctors and the interpretation of “registered medical practitioner”.

Background

Pearl is authorised to dispense medicines prescribed online by doctors based in countries based in the European Economic Area. It contracted with a third party which operated websites which offered medical screening and services, primarily for conditions such as erectile dysfunction, hair loss and obesity/weight loss.

Customers of the third party could obtain an online consultation with qualified doctors. If the doctor decided to issue a prescription, the written prescription would be sent to Pearl who would then despatch the medicine directly to the individual customer on behalf of the third party. Pearl treated all these supplies as zero-rated. The relevant law covering such prescriptions changed in 2008 such that it was now possible to dispense drugs prescribed by a qualified doctor based outside the UK.

HMRC formed the view that these supplies were not covered by the UK zero rating on the basis that an EU qualified doctor who is not registered with the GMC is not a registered medical practitioner. An assessment for output tax was issued in respect of supplies made against prescriptions written by non-UK doctors.

The issues

The issues, broadly were:

Are qualified doctors based outside the UK covered by the description “registered medical practitioner” in UK legislation?
If not, does this breach of the principle of fiscal neutrality? (Whether there is clear discrimination between identical supplies made on the prescription of UK doctors and doctors from other EU countries)

Decision

The judge ruled that the UK zero rating does not cover prescriptions written by non-UK doctors as they are not within the definition of “registered medical practitioner” Consequently, the supplies must be standard rated in the UK. However, the exclusion of medicines prescribed by overseas doctors from the zero-rating constitutes a breach of the principle of fiscal neutrality. This seemed good news for Pearl, but…the Tribunal stated that it was unable to provide an effective remedy for that breach and accordingly dismissed the appeal and affirmed HRMC’s assessment.

Commentary

This decision seems rather harsh on the appellant. It appears that the judge ruled that she had no power to override UK Parliament’s intention despite the inherent “unfairness” of the outcome of this intention where identical supplies were treated differently depending on where the prescription was written.

Certainly an odd one and I wonder if this is the last of this matter. Any business in a similar situation may need to review its position on the basis of this decision.

VAT: Brexit referrals to CJEU

By Marcus Ward 2 April 2019

A quickie

What happens to referrals to the Court of Justice of the European Union (CJEU) after Brexit day?

Put simply, from the date the UK leaves the EU UK courts will no longer be able to refer cases to CJEU. Cases referred to CJEU before the date of leaving may still be heard.

We understand that there has been a late surge of referrals before the cut off date. This is likely to mean that there will be significant number of CJEU cases which can directly impact the UK for a time to come even though the UK is no longer a Member State.

This of course assumes that:

The UK leaves the EU
UK politicians do not actually agree some sort of compromise with the EU on this point
The Brexit date is not deferred for a long period (in which case referrals to, and decisions of, the CJEU will have direct relevance to UK VAT for many years, or even decades…).

VAT Success Stories

By Marcus Ward 1 April 2019

I often write about how it is important to seek VAT advice at the right time, see triggerpoints. So, I thought that I’d give some practical examples on where we have saved our clients money, time and aggravation.

Investment company

HMRC denied claims for input tax incurred on costs relating to the potential acquisition of an overseas business and threatened to deregister the plc as it was not, currently, making taxable supplies. Additionally, HMRC contended that even if VAT registration was appropriate, the input tax incurred did not relate to taxable supplies and was therefore blocked.

We were able to persuade HMRC that our client had a right to be VAT registered because It intended to make taxable supplies (supplies with a place of supply outside the UK which would have been taxable if made in the UK) and that the input tax was recoverable as it related to these intended taxable supplies (management charges to the acquired business). This is a hot topic at the moment, but we were able to eventually demonstrate, with considerable and detailed evidence that there was a true intention.

This meant that UK VAT registration was correct and input tax running into hundreds of thousands of pounds incurred in the UK was repaid.

Restaurant

We identified and submitted a claim for a West End restaurant for nearly £200,000 overpaid output tax. We finally agreed the repayment with HMRC after dealing with issues such as the quantum of the claim and unjust enrichment.

Developer

Our property developing client specialises in very high-end residential projects in exclusive parts of London. They built a dwelling using an existing façade and part of a side elevation. We contended that it was a new build (zero rated sale and no VAT on construction costs and full input tax recovery on other costs). HMRC took the view that it was work on an existing dwelling so that 5% applied and input tax was not recoverable. After site visits, detailed plans, current and historical photograph evidence HMRC accepted the holy grail of new build. The overall cost of the project was tens of millions.

Charity

A charity client was supplying services to the NHS. The issue was whether they were standard rated supplies of staff or exempt medical services. We argued successfully that, despite previous rulings, the supplies were exempt, which benefited all parties. Our client was able to deregister from VAT, but not only that, we persuaded HMRC that input tax previously claimed could be kept. This was a rather pleasant surprise outcome. We also avoided any penalties and interest so that VAT did not represent a cost to the charity in any way. If the VAT was required to be repaid to HMRC it is likely that the charity would have been wound up.

Shoot

A group of friends met to shoot game as a hobby. They made financial contributions to the syndicate in order to take part. HMRC considered that this was a business activity and threatened to go back over 40 years and assess for output tax on the syndicate’s takings which amounted to many hundreds of thousands of pounds and would have meant the shoot could not continue. We appealed the decision to retrospectively register the syndicate.

After a four-year battle HMRC settled on the steps of the Tribunal. We were able to demonstrate that the syndicate was run on a cost sharing basis and is not “an activity likely to be carried out by a private undertaking on a market, organised within a professional framework and generally performed in the interest of generating a profit.” – A happy client.

Chemist

We assisted a chemist client who, for unfortunate reasons, had not been able to submit proper VAT returns for a number of years. We were able to reconstruct the VAT records which showed a repayment of circa £500,000 of VAT was due. We successfully negotiated with HMRC and assisted with the inspection which was generated by the claim.

The message? Never accept a HMRC decision, and seek good advice!

VAT: Partial exemption, the N Brown case

By Marcus Ward 18 March 2019

Latest from the courts.

Partial exemption has always been, and probably always will be, the most complex and oft debated area of the tax.

Attribution

In the First Tier Tribunal (FTT) case of N Brown Group plc the issue was how to attribute input tax incurred on marketing. This included:

online
catalogues and leaflets
parcel packs
inserts in magazines and newspapers
direct mailings
advertisements in publications
TV advertisements
telemarketing
brand development
PR
celebrity endorsements
market research
photo shoots

Background

N Brown, as you may know, sells clothing and household goods online to the public. It has only a few retail stores so does not have the facility that a “bricks and mortar” retailer would have of displaying goods in its stores. It therefore has to incur significant marketing costs to bring its products to the attention of its customers and present them in an attractive way that encourages sales. The activities of the appellant include the sale of these goods, which is standard-rated for VAT purposes, and the provision of finance, which is exempt for VAT purposes. The finance element is the provision of credit which produces significant income from the interest on monthly balances which consumers do not pay off.

Issue

The issue was whether the input tax incurred on the marketing was attributable to the sale of goods which were advertised or, as HMRC contended; to both its taxable and exempt income (so that it was residual). If HMRC were correct an element of the input tax would fall to be irrecoverable via the appellants’ partial exemption calculation. HMRC’s position was that the input tax which N Brown incurred in respect of the marketing is residual because, although they did not seek to deny the existence of a “direct and immediate link” between the relevant goods and services and taxable supplies that the appellant made, they consider that there is also a direct and immediate link to the exempt credit provided.

Unsurprisingly, N Brown’s position was that the vast majority of goods and services received in connection with the marketing had a “direct and immediate link” only with taxable supplies that it made and so the relevant input tax was not residual and is therefore recoverable in full.

A subtle distinction, however, as £42 million of VAT was at stake, quite a vital one!

Technical

A general guide to partial exemption is available here

Broadly, a partially exempt business is required to attribute input tax incurred to three categories:

Taxable activities (here, the sale of goods) fully recoverable
Exempt activities (here the provision of credit) not recoverable
Non-attributable (residual) – input tax attributable to both taxable and exempt activities, or neither. This input tax must be apportioned either by the “standard method” or special method agreed with HMRC.

Decision

The judge found that there was a two-way relationship between the sale of the goods and the provision of credit terms. As a consequence, the input tax fell into the category of non-attributable (residual) even if the relevant advertisements made no mention of credit at all. It was also found that the standard method (used by HMRC) did not produce a reasonable outcome so the assessment issued by HMRC would need adjustment in the taxpayer’s favour. This required a different method to be devised and that certain elements of exempt income could be ignored in the calculation. I suspect that negotiations on an agreeable method might take some time…

Commentary

This case demonstrates that care is always required when costs are attributed to a business’ activities. This is especially important when the costs are significant. There tends to be a lot of “debate” with HMRC on such matters and slight nuances can affect attribution and thus the outcome of the calculation. It is an area which always requires specialised advice.

VAT: Input tax recovery on director’s costs

By Marcus Ward 18 March 2019

Latest from the courts: Directors expenditure – what may be recovered as input tax?

The Praesto Consulting UK Limited Court of Appeal (CoA) case.

This is a subject that pops up every now and again: Is a purchase for the director’s business purposes (input tax usually recoverable by the company) or for a director personally (so non-business and not recoverable)?

Background

Mr Ranson was an ex-employee of a claimant in civil proceedings; Customer Systems plc (“CSP”). Mr Ranson resigned to set up a company of which he was sole director, “Praesto”, which then carried on a consultancy business competing with CSP. CSP issued proceedings against Mr Ranson (and three other employees) over the nature of the departure from the company, but not against Praesto itself. The acting solicitor firm issued eight invoices (containing the VAT in question) to Mr Ranson personally, and not his company. The invoices were paid by Praesto

Issue

Praesto paid the legal fees relating to the defence of the civil proceedings brought by CSP against its sole director. Is the company entitled to credit for VAT input tax charged in relation to those fees? That is, was it proper business expenditure by the company, or was the defence of the case a personal cost of the director as a (distinct) individual?

HMRC laid great stress on the fact that the invoices were addressed to Mr Ranson personally, that they related to services provided in relation to the claim brought by CSP against him and that Praesto was never joined as a party to the proceedings.

Decision

The CoA ruled that Praesto could recover VAT on the fees. The action against Mr Ranson was the first phase of litigation which would ultimately seek damages from Praesto (and therefore Praesto had a direct interest in CSP’s claim being dismissed). This was an indication that there was a direct and immediate link between the legal services provided and the business. In reality, Praesto was throughout the proceedings, the main target of the litigation: It was Praesto which had made the profits which CSP sought to claim.

The fact that the invoices were addressed to Mt Ranson provided no legal bar to the company recovering the associated input tax. The judge observed that there was a joint retainer whereby the solicitor firm was being instructed by, and acting on behalf of, both Mr Ranson and Praesto. Under such a retainer both Mr Ranson and Praesto would be entitled to the solicitor’s’ services and both would be jointly and severally liable for the fees. That is a legal relationship involving reciprocal performance. As both parties were jointly and severally liable for the fees, there would be no particular significance in addressing invoices to only one of the parties so liable.

This seems an entirely sensible decision.

Commentary

This has echoes of the P&O case: P&O Ferries (Dover) Ltd v Commissioners of Customs & Excise [1992] VATTR 221 referred to in this case, where criminal proceedings were brought against various P&O employees and the company itself arising out of the Herald of Free Enterprise Zeebrugge disaster – the company paid for the legal representation of all the individual defendants and claimed input tax on the costs of so doing. It was held that the conviction of even one of the individual employees would have caused severe damage to the public perception of the company’s business. To mitigate the real risk of being driven out of business the board took the view that the company had to take every step available to it to guard against the successful prosecution of each of the individual employees. The legal services in question were, therefore, used for the purpose of the company’s business.

Another area where VAT on costs invoiced to a (future) director personally are recoverable is in pre-incorporation cases where (obviously) the company does not exist so cannot, at that time, recover the VAT. HMRC permit recovery in such cases if the recipient of the invoice does indeed become a director of the company and the supply is used by that company for business purposes

Please contact us if you have any queries.

VAT: Input tax claims – alternative evidence

By Marcus Ward 7 March 2019

What can be used to make a claim?

It is well known that in order to claim input tax on expenditure a business is required to have a valid tax invoice to support it. But what if there is no VAT invoice? Can HMRC accept any other evidence to support a claim? Well, the answer is yes… sometimes.

HMRC has discretion provided by EC law. The right to deduct is given by Article 167 of the Principal VAT Directive (via VAT Regulations 1995/2518 Reg 29(2) in the UK). Specifically, the wording most relevant here is “…such other documentary evidence of the charge to VAT as the Commissioners may direct.” Broadly, a business must hold the correct evidence before being able to exercise the right to deduct.

Where claims to deduct VAT are not supported by a valid VAT invoice HMRC staff are required to consider whether there is satisfactory alternative evidence of the taxable supply available to support deduction. HMRC staff should not simply refuse a claim without giving reasonable consideration to such evidence. HMRC has a duty to ensure that taxpayers pay no more tax than is properly due. However, this obligation is balanced against a duty to protect the public revenue.

Full details of tax invoices here.

What HMRC consider

HMRC staff are required to work through the following checklist:

Does the business have alternative documentary evidence other than an invoice (for example a supplier statement)?
Does the business have evidence of receipt of a taxable supply on which VAT has been charged?
Does the business have evidence of payment?
Does the business have evidence of how the goods/services have been consumed or evidence regarding their onward supply?
How did the business know the supplier existed?
How was the business relationship with the supplier established? For example: How was contact made?
Does the business know where the supplier operates from (have staff visited?)
How did the business contact them?
How does the business know the supplier can supply the goods or services?
If goods, how does the business know they are not stolen?
How does the business return faulty supplies?

Outcome

If the responses to the above tests are credible, HMRC staff should exercise their discretion to allow the taxpayer to deduct the input tax. Overall, HMRC are required to be satisfied that sufficient evidence is held by the business which demonstrates that VAT has been paid on a taxable supply of goods or services received by that business and which were used by that business for its taxable activities

Challenge HMRC’s decision

A business may only challenge HMRC’s decision not to allow a claim (did not exercise its discretion) if it acted in an unfair or unreasonable way. In these cases, the onus is on the taxpayer to demonstrate that HMRC have been unreasonable in not using the available discretion. This is quite often a difficult thing to do.

Case law

Not surprisingly, there is significant case law on this subject. The most relevant and recent being the Upper Tribunal (UT) cases of James Boyce and Scandico Ltd.

Tips

If possible, always obtain a proper tax invoice from a supplier, and don’t lose it! The level of evidence required when no invoice is held usually depends on the value of the claim. There would be a difference between persuading an inspector that £20 input tax on stationery is recoverable and the claiming of £200,000 VAT on a property purchase is permissible. As always in VAT, if you get it wrong and claim VAT without the appropriate evidence there is likely to be a penalty to pay.

If you, or your clients are in dispute with HMRC on input tax claims, please contact us.

VAT: More on the Mercedes Benz Financial Services case – PCP

By Marcus Ward 1 March 2019

Further to my article on the Mercedes Benz Financial Services (MBFS) case on Personal Contract Purchase (PCP), HMRC has published a Briefing Note – Changes to the VAT treatment of PCPs

HMRC has fully implemented the findings in the MBFS CJEU case. In summary, HMRC state that:

“The correct treatment of PCP and similar contracts depends on the level at which the final optional payment is set:

if, at the start of the contract, it is set at or above the anticipated market value of the goods at the time the option is to be exercised, the VAT treatment of the contract will follow the MBFS It is a supply of leasing services from the outset and VAT must be accounted for on the full value of each instalment, there is no advance, or credit, so there is no finance
if, at the start of the contract, it is set below the anticipated market value, such that a rational customer would buy the asset when they exercise the option, it is a supply of goods, with a separate supply of finance. VAT is due on the supply of goods in full at the outset of the contract, the finance is exempt from VAT”

This treatment must be used by 1 June 2019. Past declarations which have been in error must be adjusted per PN 700/45. Businesses affected by the changes may also need to consider adjustments to input tax claimed, or forgone in respect of partial exemption. A guide to partial exemption here.