New changes to the VAT treatment of some leasing agreements could improve cash flow for finance providers

20th October 2017

How and when VAT is applied to vehicle and asset leasing agreements, under which the transfer of ownership in the asset is not automatic and may only occur where the lessor chooses to exercise the option, could be about to change following a recent court case.

The judgement of the Court of Justice of the European Union in the case of Mercedes Benz Financial Services, found that these types of conditional leasing agreements should be treated as a supply of services rather than a supply of goods, directly impacting how VAT will be applied. The decision will now be reviewed by the Court of Appeal which will decide how to apply the judgement.

The VAT consequences of this means that potentially lessors and finance companies will only be required to account for VAT on the receipt of each monthly payment due under the leasing agreement. By contrast, these companies currently have to pay the full amount of VAT to HMRC upfront at the start of the contract.    

This change could have a positive impact on cash flow and allow companies to manage their finances more evenly across the contract periods.

Organisations that are traditionally regarded as being partially exempt for VAT purposes, such as education providers and charities, may also find that they have less VAT to pay in the first place, as well as being able to spread the payments across the contract term, which could impact the amount of VAT they have had to restrict under partial exemption calculations.

For asset and vehicle financiers, it may be possible to submit claims for the VAT that has potentially already been overpaid as a result of it being accounted for in full to HMRC at the start of the agreement, rather than paying it over with each monthly payment.

We now await further comment from the Court of Appeal and from HMRC on the application of this decision in the UK.

If you think that you could be impacted in any way and would like to understand how these changes could affect your business and whether there is a potential to make a claim for overpaid VAT, please contact Jessica Mason, Harrison Beale and Owen’s VAT Consultant on 01926 422292 or 02476 631303