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HMRC internal manual

VAT Finance Manual

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HM Revenue & Customs
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Credit, debts and related services: credit and related services: deferred payments

Introduction

When a supplier of goods or services allows his customer to defer payment of those goods or services after delivery in return for an additional charge, this latter charge is exempt under Group 5, item 2 as consideration for a grant of credit (the VAT treatment of the goods or services themselves is dealt with according to the normal rules).

This principle was demonstrated in the ECJ case Muys’ en De Winter’s Bouw-en Aannemingsbedrijf BV v Staatssecretaris van Financiën (‘Muys’ - Case C-281/92 ([1997] STC 665), which considered whether a deferred payment amounted to the granting of credit.

Muys

Muys was a construction company that supplied land with buildings. The terms of the contracts drawn up between the company and its clients allowed for the client to defer payment of the amount due for the land and/or the construction until the day on which the land/buildings were transferred. When this happened, the purchaser had to pay interest on the amount of the deferred payment.

The Court ruled that Article 13B (d) (1) of the Sixth Directive (now Article 135. 1(b) of The VAT directive) must be interpreted as meaning that a supplier of goods or services who authorises his customer to defer payment of the price, in return for the payment of interest, is in principle making an exempt grant of credit within the meaning of that provision. However, where a supplier of goods or services grants his customer deferral of payment of the price, in return for the payment of interest, only until delivery, that interest does not constitute consideration for the grant of credit but part of the consideration obtained for the supply of goods or services within the meaning of Article 11(A) (1) (a) of the Sixth Directive (now Article 73 of the VAT directive).

Thus, if payments are received prior to the goods being delivered or the service being performed, all payments are further consideration for those goods or services and follow their liability. On the other hand, if payment is deferred after the point where the goods are delivered or the service is performed, any additional amount charged over and above the price of the goods or service will be treated as being interest on an exempt grant of credit.

Membership fees and subscriptions

Where an organisation allows members the option to defer payment of membership fees or subscriptions for an additional fee the additional fee charged over and above the membership fee or subscription is consideration for an exempt grant of credit under Group 5, item 2.

For example, a customer joins a leisure facility and completes an agreement to remain with the facility for a period of twelve months. The customer is given the option to either pay the twelve-month fee (e.g. £1,200) in one go at the beginning of the period or defer payment over the twelve months, paying a sum per month (e.g. £100) plus an additional sum per month (e.g. £25). The customer decides to defer payment over the twelve-month period. The additional sum charged (e.g. £25) is consideration for an exempt grant of credit.

Where the customer is not provided with an option to defer payment (e.g. he can only pay in instalments over a period of time) there is no grant of credit and any additional charge is treated as being further consideration for the main supply.

Where the term of membership ceases but fees continue to be paid and no new membership agreement is entered into then all amounts received should be treated as being consideration for the main supply. No amounts will be treated as being consideration for a grant of credit.

Disclosure of additional charges

The supplier of the goods or services may openly disclose any additional charges in the documents put before the customer. However, in some cases, e.g. with leisure facilities, the disclosure may not be so apparent, but that isn’t to say that the additional charge hasn’t been disclosed. So long as there is a reasonable expectation that the customer would be aware that by deferring payment he is paying a greater amount than if he had not deferred payment, then this is enough to ensure the disclosure provisions have been met.