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March 25, 2013updated 12 Apr 2017 4:03pm

Is a lease a service or a good?

Judy Harrison discusses the latest HMRC briefing on VAT for finance leases.

By Judy Harrison

The UK’s HMRC has published a business brief confirming it is considering whether to change the VAT treatment of finance leases.

The business brief follows on from the European Court of Justice decision on EON Aset Menidjmunt which created some confusion by stating supplies under certain finance leases should be treated as supplies of goods rather than supplies of services.

This is contrary to the longstanding UK practice of treating leases as supplies of services; some other European jurisdictions such as Germany have long viewed finance leases as supplies of goods.

The significance of a lease being a supply of goods, rather than services is that VAT generally will be due at the start of the contract rather than as each rental becomes due. It may also affect the place of supply (the jurisdiction in which VAT is paid) in cross-border transactions.

Where the lessee is a business, VAT is typically due in the lessee’s home jurisdiction. However, if a lease were treated as a supply of goods, the general rule is VAT is due in the country where the leased assets are located.

The EON judgment set out factors which indicate a lease should be treated as a supply of goods; in particular, where ownership of the asset will pass to the lessee on expiry of the lease, where all the risks and rewards of ownership have been passed to the lessee or where the present value of the lease payments is practically identical to the value of the asset.

This raises the possibility some but not all finance leases could be treated as supplies of goods. If this were so, there would be a strong argument such changes should only be introduced for new leases, as the administrative burden of assessing whether existing leases should be treated as supplies of goods or services could be considerable.

If the UK was to change the VAT treatment of finance leasing, it will need to consider whether all of the lease rents are consideration for a supply of goods or whether part of the rents should be treated as consideration for an exempt supply of finance. At present, the financing element of a finance lease is taxed as part of the main supply of leasing. This contrasts with the treatment of hire purchases – which are treated as two supplies – one of goods and the second of finance. The effect of treating finance leasing in the same way as a hire purchase is likely to impact on the amount of VAT certain lessors can recover.

HMRC is currently considering representations made by industry representatives, and it is hoped as a result, whatever changes are introduced do not introduce significant administrative burdens for lessees and lessors.

Judy Harrison is a senior associate with Norton Rose

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