The VAT treatment of finance leases in the UK has been well understood for many years, with VAT being accounted for at the time that periodic payments are due under the terms of the agreement. This should be contrasted with VAT accounting in relation to hire purchase agreements, where VAT is accounted for in full at the start of the contract.
This established treatment has, however, been called into doubt by a little-reported ruling of the European Court of Justice (CJEU) in a Bulgarian case Eon Aset Menidjmunt OOD (C-118/11) (EON).
The principal reason for the difference in the way VAT is accounted for under hire purchase agreements and finance leases is that hire purchase agreements are treated for VAT purposes as being supplies of goods, on the basis that the goods are deemed to be supplied, with title passing, at the outset of the agreement.
As a consequence VAT has to be accounted for at the start of the contract. By contrast, under a finance lease there is no initial acquisition of the goods by the lessee, though the contract may provide an option for the lessee to acquire the goods at the end of the lease period. For this reason the supply is treated as a supply of services with any VAT being accounted for over the term of the lease.
In the EON case the question the CJEU was asked to consider was whether the VAT incurred by EON on the lease of a vehicle was recoverable. In the course of its consideration, the CJEU stated that, as the leasing of a motor vehicle is not a supply of goods it should, under normal rules, be treated as a supply of services. So far so good, as this confirms the current UK treatment.
However, the CJEU then went on to suggest that a finance lease could have features that “are comparable to those of the acquisition of capital goods”.
In analysing the position the CJEU considered that where a finance lease relating to a motor vehicle provides either that:
- Ownerships of the vehicle will pass to the lessee on expiry of the lease, or
- the lessee possesses all the powers attaching to ownership of the vehicle and, in particular, that all the rewards and risks incidental to legal ownership of the vehicle are passed to the lessee and
- the present value of the amount of the lease payments is practically identical to the market value of the vehicle,
…then the transaction should be treated as a supply of goods.
The CJEU left it for the national court to decide whether the contract in question should be treated as a supply of goods or services.
Mindful of the EON judgment, we understand that HMRC has begun a review of the UK interpretation of how finance leases should be treated and it is therefore possible that the outcome of the review may result in VAT having to be brought to account at the start of a finance lease in future.
Tarun Mistry is a partner in Grant Thornton’s Leasing & Consumer Finance advisory team