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HMRC internal manual

VAT Time of supply

Tax points for specific types of supply: Hire purchase, credit sales and conditional sales

Introduction
 
Basic tax point
VAT invoices
Deposits
Tax point for the credit element

Introduction

Goods supplied on hire purchase, or under credit or conditional sale agreements, are generally treated in the same way as an outright sale where title passes at the outset. This means that, unless the supplier issues a VAT invoice, the time of supply will be linked to the basic tax point.

Nevertheless, it is important to first establish the supply position before considering the time of supply. For example, is the credit self-financed by the supplier? If it is there will be a supply of the goods direct to the customer. On the other hand, the involvement of a third party finance company could mean that there are two supplies comprising of a supply to the finance company and by the finance company to the customer. However, this should not be assumed. For example, if the finance is via an unsecured loan, there is unlikely to be a supply of the goods to the finance company providing the loan.

Following the CJEU decision in Mercedes Benz Financial Services (MBFS) C-164/16 (see VATSC10172) certain contracts, which may be described as Hire Purchase contracts, are for VAT purposes treated as a lease and a single supply of services (and not as a supply of goods and a separate supply of credit). These are Personal Contract Purchase (PCP) or similar agreements where the contract provides for a substantive optional payment.  These optional payments may be set at different levels:

  • 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 analysis. 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 it is a supply of goods, with a separate supply of finance, VAT is due on the whole of the charge for the goods at the outset of the contract.

Officers should accept that the optional payment is set below the anticipated market value if it is below the value expected based on historical depreciation rates in immediately preceding years for the same or similar assets, such as the same model of car.

Businesses may use other methods to establish the likely open market value of the asset.  If they choose to do so they must maintain evidence which demonstrates how they have arrived at the figures they have used. 

Only if the valuation is clearly at odds with market information should officers challenge the methodology chosen.  In cases of doubt please contact the Motor Unit of Expertise for advice.   Remember it is the value the business would expect to get when the option is due to be exercised at the time the contract is entered into that counts. Not what the open market value actually turns out to be when the option is exercised. 

For transitional arrangements Following the MBFS decision see Revenue and Customs Brief 1/2019

The following paragraphs consider the time of supply firstly for the supply of the goods and secondly for the supply of the credit element in contracts that do not contain an optional final payment set at the outset of the contract at or above the anticipated open market value of the asset.

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Basic tax point

The basic tax point for the supply to the customer will, in most cases, be the date of delivery or collection of the goods. Where there are two supplies (for example to and by a finance company) this is the basic tax point for the supply by the finance company to its customer. The basic tax point for the supply to the finance company will normally occur at the time when the goods are made available to the finance company. Unless the agreement indicates to the contrary, this may be taken to be the time when the finance agreement comes into force, possibly at the time when the last party signs up to it.

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VAT invoices

In some cases the finance agreement document also serves as a VAT invoice when it is issued to the customer and the normal time of supply rules apply. A VAT invoice issued to the customer, whether it be the agreement or a conventional VAT invoice, will create the tax point for the supply where it is issued in advance, or within 14 days, of the basic tax point.

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Deposits

A deposit paid before

  • the agreement has come into force, or
  • the goods have been removed, or
  • a VAT invoice has been issued

will normally create a tax point.

The precise effect will depend on the circumstances. For example, a customer may place an order for goods and at the same time be required to pay a deposit. This will create a tax point to the extent of the amount paid on the basis that, at that time, a supply is anticipated between the two parties. A finance agreement is subsequently set up via a third party finance company. As a result the initial deposit is converted into a payment by the customer to the finance company, which in turn is credited as a payment by the finance company in respect of the supply of the goods by the original supplier to the finance company. The initial tax point is thereby cancelled.

Unless overridden by other tax points that may have arisen during the intervening period (for example by making available/delivery of the goods), these adjustments will represent further simultaneous payment tax points for both the original recipient and the finance company.

Alternatively, a deposit may be collected by the supplier as part of the finance agreement procedure. It is initially received by the supplier as agent for the finance company but is then immediately “received” by the supplier as part payment for the supply to the finance company. Again, provided this is not preceded by a basic tax point or the issue of a VAT invoice, a payment tax point will have been created for both the supplier and the finance company. You will see from these examples that the effect of a pre-payment is governed by the circumstances in which it is received.

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Tax point for the credit element

The tax point for the separate supply of credit is the date of payment of the interest. Where the instalments include an element attributable to the charge for credit this will mean that a tax point occurs each time a payment is received. It is acknowledged that some suppliers may have difficulty in isolating the credit charge where the agreement provides for a fixed rate of interest. In these circumstances an accommodation tax point may be appropriate (see VATTOS6300).