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”.

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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