The Court of Justice of the European Union (CJEU) recently ruled in favour of Mercedes-Benz Financial Services UK Ltd (MBFS) in a case concerning the VAT treatment of a specific type of car leasing agreement.
The case was taken to the CJEU by HM Revenue & Customs (HMRC) in the UK from the Court of Appeal. The case concerned the VAT treatment of a specific motor vehicle finance agreement called ‘Agility’ which MBFS offered to customers who are undecided as to whether they want to own the car or want to keep open the option of whether to purchase or not.
The Agility agreement is marketed as a hire purchase contract, but offers lower monthly payments than a typical hire agreement and does not cover the full value of the vehicle. It allows the customer to lease the vehicle for a prescribed period, after which the customer can purchase the car subject to payment of a final 'optionally purchase payment'.
MBFS treat the Agility arrangement as a rental agreement with an option to purchase and therefore, treated its supplies as services for VAT purposes.
CJEU case law has established that lease agreements should, as a rule, be treated as supplies of services. However, HMRC argued that the Agility agreement should be treated as a supply of goods. HMRC’s view is a direct reflection of the wording of the VAT Directive, which provides that where in a contract ‘in the normal course of events, ownership is to pass at the latest upon payment of the final instalment’ as a supply of goods.
The ruling in the MBFS case stated that ‘legal certainty requires that lease agreements should be regarded as supplies of goods for the purpose of levying VAT only when it can be assumed with certainty that in the normal course of events, at the latest by the end of the agreement term, ownership of the subject matter of the leasing agreement will be transferred to the lessee.’
The CJEU noted that the title or name attached to a specific agreement for the hiring of a motor vehicle with an option to purchase (e.g. ‘finance lease’ or ‘hire purchase’) is not determinative as to whether the supply is one of goods or services.
The court set out certain tests which can be used to determine whether a supply can be treated as goods under Article 14(2)(b) of the VAT directive including: the contract must include a clause expressly relating to the transfer of ownership of the goods; and objectively assessed, ownership of the goods will pass automatically through the normal performance, over the full term, of the contract.
In a contract where the first of the above tests is met but where the transfer of ownership of the goods is not automatic but is one of a number of options available to the customer (other options could for example be to return the goods or extend the hire period), the second test above will not be met. Thus the contract will not fall within Article 14(2)(b).
However, as an exception to the second test, the contract will fall within Article 14(2)(b), where the contractual instalments correspond to the market value of the goods including financing; and the customer will not be required to pay a substantial additional fee to exercise the option to purchase.
The decision in this case can create a significant cash flow advantage as it means the supplier does not have to account for output VAT upfront on the full price, instead VAT is due when instalment payments are paid.
As a consequence of this judgement many leasing arrangements across all types of industries have undergone review and in some cases, have required amendment to ensure the criteria of the leasing arrangements speaks clearly as which type of leasing arrangement it is.
The Malta Yacht VAT leasing scheme has been one such example where there was a requirement to revisit the arrangements and to clarify the implementation to define the VAT position.
Consequently, the Malta VAT Department has made some amendments to the operation of the Malta yacht VAT leasing scheme. To emphasis the points made in the MBFS case the Malta VAT Department has been clear in its amendments that the operation of the VAT leasing scheme is separate from any decisions or actions in respect of whether the yacht is sold by the Lessor at the end of the leasing period to the Lessee.
The duration of the leasing period has not changed and will need to be operated for a period between 12 months and 36 months. Likewise, prior approval must be obtained from the VAT Department before entering into any yacht VAT lease agreement.
The amendments to the Malta yacht leasing scheme are effective from December 2017. Any schemes in place prior to December 2017 will run under the old scheme rules.
Written by Samantha Snow
Client Services Director of Abacus Trust Company Limited
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