In Mercedes-Benz Financial Services UK Ltd4 the Upper Tribunal (UT), reversed the FTT decision, and held that a car finance agreement with an option to buy the vehicle is a supply of services, and not a supply of goods, for VAT purposes. The main practical effect of the distinction is that whereas VAT must be paid up front on consideration for a supply of goods, it must only be accounted for as payments are received on a supply of services.
The case concerned the interpretation of Article 14(2)(b) of Council Directive 2006/112/EC (the VAT Directive), which includes within the scope of a supply of goods the actual handing over of goods pursuant to a contract for the hire of goods (or for the sale of goods on deferred terms) where the goods pass “in the normal course of events” at the latest upon payment of the final instalment.
The appellant had, since 2007, offered a financial product to customers whereby, in return for monthly payments for a specified period, the customer obtained the use of a Mercedes car. At the end of the period, the customer had the option to acquire the car. The particular “Agility” product in issue was recommended to customers who, at the inception of the agreement, were undecided as to whether they wished to ultimately purchase the car. The price payable on exercising the option to purchase under the Agility agreement was substantial (unlike under the hire purchase agreements offered by Mercedes) and calculated to equate to the expected market value of the car at maturity of the agreement.
The UT held that the Agility agreement was not a contract which provides, in the “normal course of events” for the car to pass to the customer. In particular:
- The FTT had erred in law in interpreting the VAT Directive. For a contract to fall within Article 14(2)(b), the acquisition of the car (in this case) had to be the “normal outcome”, rather than a “normal outcome”. This is determined by considering the economic purpose of the contract, which in turn required the identification of the precise way in which the contract satisfied the respective parties’ interests
- Although the Agility customer might well ultimately purchase the car, they equally might well not. In the words of Mr Justice Nugee, it was not at all a “foregone conclusion”, contractually or economically, that the customer would opt to purchase
- Mercedes was financially neutral as to whether the customer exercised its purchase option or not
- The FTT’s conclusion was not one that a reasonable tribunal, properly directed, could reach. The only reasonable conclusion the FTT could have reached from the material before it was that the Agility contract gave the customer an opportunity to purchase the car, but also a genuine choice as to whether or not to do so. Accordingly the contract did not amount to a supply of goods pursuant to Article 14(2)(b)
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