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HMRC internal manual

VAT Finance Manual

Credit, debts and related services: credit and related services: credit supplied with goods or services


As well as the examples set out in VATFIN3115, item 2 also covers credit when supplied with goods or services, for example, a credit facility in connection with the purchase of a car. The car dealer may provide the credit for whole or part of the amount for a fixed period, or accept instalments under a hire purchase, conditional sale or credit sale agreement or the finance may be provided by a third party . For there to be an exempt supply of credit in such cases, a separate charge for the credit must be made and disclosed to the customer, which is discussed in VATFIN3125. The VAT Act 1994, Schedule 9, Group 5, item 3 and note (3) covers this.

Instalment credit finance

Instalment credit finance is different from leasing. In the former, ownership of the goods transfers or is intended to transfer at some point and this is therefore a supply of goods (see VATSC70000) with connected supplies of credit in some instances. Leasing arrangements do not involve transfer of ownership and so are supplies of services.

The most common means of supplying goods with credit are:

### Type of agreement ### Comments
Conditional sale Consideration is payable by instalments and the goods remain the property of the seller until the full price is paid and/or any other conditions are met by the customer. The full amount of VAT on the goods is normally payable with the first instalment; any charge for credit finance will be exempt provided the disclosure conditions have been met
Credit sale The sale of goods which immediately become the property of the customer, but where the price is payable by instalments. Again, the charge for credit finance will be exempt if the disclosure conditions have been met.
Hire purchase (other than conditional sale) Legally, such goods are hired for periodic payments and the hirer has the option to purchase. However, the VAT supply position is the same as for conditional sale because ownership is intended to transfer.

Guidance to help you decide whether a particular contract is a supply of the service of leasing goods or a supply of the goods themselves is available in VATSC70000. In conclusion, there are, for VAT purposes, normally two supplies when credit is provided with supplies of goods:

  • the supply of the goods at the rate of VAT applicable, the value for VAT purposes being the cash price stipulated in the agreement
  • the supply of credit, which is exempt under Group 5, item 3 provided that a separate charge for credit is made and disclosed to the customer.

There may also be other charges made under the credit agreement (see VATFIN3125).

Self financed credit

This is an arrangement between a supplier and a customer where the supplier allows the customer to pay for goods or services over a set period, with or without charging interest. The supply of the goods or services is taxable according to their liability and normal tax point rules will apply.

Third-party financed credit

This is where the supplier makes a supply to the customer but receives payment from a finance company. At the same time, the customer enters an agreement with the finance company for the loan and repayment of the money. In day-to-day commerce - particularly retailing - this is the more common type of credit arrangement.

Interest-free credit

Where a retailer or third party provides credit and allows the customer to repay only the exact amount loaned this is termed ‘interest-free’.

The VAT treatment of this form of credit sale has been determined by the ECJ judgment in the case of Primback Ltd (‘Primback’ - Case C-34/99 ([2001] STC 803).

Primback, a furniture retailer, advertised goods on interest free credit terms. On purchasing the goods, the customer completed a written agreement with a finance company for a loan of the price of the goods (less any deposit). Under this agreement the amount of the loan was to be paid on the customer’s behalf to Primback, and was to be repaid by the customer to the finance company in instalments, but without any additional charge for interest. For example, where goods were sold for £600 on six months interest free credit terms, then, as far as the customer was concerned, he merely paid 6 instalments of £100 to the finance company.

Under separate arrangements between the finance company and Primback, however, the finance company made a deduction from the amount forwarded to Primback, which accordingly received only, say £560, not the full amount of £600. The Commissioners regarded this deduction as third party consideration, paid by Primback for the loan made to the customer, and that output tax on £600 was due.

The ECJ found that because there is no consideration, in the form of interest, paid by the consumer on an interest-free loan, there is no supply for VAT purposes. It also found that the consideration for the taxable goods was the full amount payable by the purchaser.


For the purposes of item 3, which states that any separate charge made must be disclosed to the recipient of the supply of goods, the disclosure can be made either in writing or orally, and either clearly or obliquely. (See Freight Transport Leasing Ltd (‘FTL’ - Tribunal decision 5578).

Credit sales - repossession of goods

Please see sub-paragraph 4.3 of VAT Notice 701/49 Finance.