Advocate General Szpunar has provided his opinion in HMRC v Mercedes Benz Financial Services UK (Case C-164/16). In his view, only transactions which offer certainty that ownership passes to the lessee at the end of the agreement term (such as hire purchase contracts), are supplies of goods for the purposes of VAT.


Mercedes Benz Financial Services (MBFS) offers various financial products in relation to the use and acquisition of vehicles. It offers three standard types of vehicle-use agreements: leasing, hire purchase and a mixed agreement called "Agility". The case concerned the classification of the "Agility" arrangements for VAT purposes.

Under the Agility arrangements, following the expiry of the lease, the lessee had the option to purchase the vehicle, subject to payment of the final amount which corresponded to the mean anticipated value of the vehicle at the time of purchase (in the examples provided, this amount varied from 42% to 48% of the initial price). The issue was whether, for VAT purposes, this arrangement was a supply of goods or a supply of services.

MBFS marketed the Agility arrangements as involving a hire purchase contract and considered that there was a supply of services with output VAT due on receipt of each payment under the lease. HMRC disagreed. It argued that the arrangements involved a supply of goods and that output VAT was due on the full value of the supply at the outset of the lease. HMRC relied on the wording of the VAT Directive which provides that there is a supply of goods where "in the normal course of events, ownership is to pass at the latest upon payment of the final instalment". 

The matter was appealed to the FTT and then to the Upper Tribunal and the Court of Appeal. The Court of Appeal decided to refer certain questions to the Court of Justice of the European Union (CJEU).

Advocate General's opinion

On 31 May 2017, Advocate General Spuznar delivered his opinion on whether, and in what circumstances, a leasing agreement with an option for the lessee to purchase the subject matter of the lease following the expiry of the term, should be regarded as a supply of goods under Article 14(2)(b) of Directive 2006/112.

The Advocate General observed that Article 14(2)(b) covers an agreement containing a clause "which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment". In his view, such an agreement must contain an ownership transfer clause. This can be either a decision automatically to transfer ownership by the end of the agreement term or an option to purchase the leased asset. Agreements which do not contain any decision on the transfer of ownership are not covered by Article 14(2)(b). There must be transfer of ownership following the 'normal course of events'. This should be regarded as a series of events envisaged as a result of normal performance of the agreement. It may be extended to include activities such as exercising a right to purchase, however, there must be a high degree of certainty that the option will be exercised and title will pass to the lessee. Situations where a lessee has a genuine choice are not covered by Article 14(2)(b). Finally, transfer of ownership must take place at the latest upon payment of the final instalment. Where the quantum of the lease payments are such that, over time, the lessee has paid the full price for the asset, and if the exercise of the option does not require further significant payments, then that is equivalent of transfer of ownership within the scope of Article 14(2)(b).

Applying the above analysis to the circumstances in the present case, the Advocate General agreed with MFBS. The contracts offered required substantial payment at term to secure ownership and were not therefore supplies of goods within the scope of Article 14(2)(b) but rather were supplies of services. VAT was therefore due on a cash received basis.


Due to the mixed nature of leasing agreements it is not always evident whether they should be classed as a supply of goods or a supply of services. The distinction is, however, important and can have a real impact on the economics of a lease. Although the CJEU has considered numerous cases concerning leasing arrangements, none has had a conclusive bearing on the method of classifying such transactions for VAT purposes. This case presents the CJEU with an opportunity to provide some clear guidance to taxpayers in this complex area.

Although an Advocate General's opinion is not binding on the CJEU, they are followed in the majority of cases and it will be interesting to see if the CJEU reaches the same conclusion in this case. If it does, its judgment will have major implications for the asset leasing sector.

The CJEU's judgment is expected later this year.

A copy of Advocate General Spuznar's opinion is available to view here.