Mercedes-Benz Financial Services UK Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 17 December 2012 |
| Neutral Citation | [2013] UKFTT 381 (TC) |
| Date | 17 December 2012 |
| Court | First Tier Tribunal (Tax Chamber) |
[2013] UKFTT 381 (TC)
Judge Michael Tildesley OBE, Ruth Watts Davies FCIPD MIH.
Keith Prosser QC instructed by DLA Piper UK LLP appeared for the Appellant
Owain Thomas instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the Respondents
VAT - supply - whether a particular type of motor vehicle finance agreement, called "Agility", was a supply of goods or services - supply of goods - appeal dismissed.
The First-tier Tribunal dismissed a taxpayer company's appeal against HMRC's decision that its vehicle finance agreement with its customers constituted a supply of goods on deferred terms within the Council Directive 2006/112/EC ("VAT Directive 2006"), eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b). The agreement's terms (the description as a hire purchase, the provision for a deposit payment, the specified financial information including the cash price for the vehicle, the substantial capital payment inherent in the contract structure, and the option to purchase) were compelling indicators of a contract of sale of a car. Thus, VAT was chargeable at the outset of the agreement. As the option to purchase constituted the sole realistic option, the transfer of ownership was central, not tangential, to the agreement. The phrase "in normal course of events" under VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) was directed at the legal realities of a contract for sale with an option to purchase; hence, the fact that ownership might not transfer under the agreement did not preclude it from being a contract for sale. The Tribunal considered that even on the wider circumstances, the contention that the agreement gave choices to the customers was illusory. From a commercial perspective, the agreement would be categorised as an affordable hire purchase product which carried no risks on the metal (the vehicle) for the taxpayer.
The taxpayer provided asset-backed financial products and ancillary services to its customers when they purchased or leased motor vehicles from the corporate retail dealers. In August 2007, the taxpayer entered into a vehicle finance agreement ("the Agility") with its customers, which supplemented its existing finance options of hire purchase and leasing. The taxpayer marketed the Agility as a distinct financial product, giving the customer a choice of three options (purchase, return, and purchase and part-exchange) in respect of the motor vehicle at the end of the agreement.
Under the Agility, the customers were required to make monthly payments to discharge the amount of credit, including the interest they borrowed in respect of a named vehicle. In return, they were entitled to have possession of the vehicle. The Agility gave them an option to purchase once they made all payments liable under the agreement, except the optional purchase payment and purchase activation fee. The option to purchase was exercised only by making the optional purchase payment before the due date. The taxpayer retained the ownership of the vehicle until the customers had exercised the option to purchase and made all the payments due under the agreement. If the customers did not exercise the option to purchase, they were required to return the vehicle to the taxpayer in good condition. If they returned the vehicle, they might be liable for excess distance and damage charges. The Agility included a provision for the payment of a deposit. It also specified detailed financial information which included the total payable, the total cash price of vehicle and the total charge for credit.
The taxpayer contended that the Agility was a rental agreement with an option to purchase. The motor vehicle would not automatically pass unless and until the customers chose to purchase the vehicle. Thus, on a proper analysis of the agreement, the taxpayer made a supply of services. VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) should be construed from a commercial point of view which enabled the Tribunal to have regard to the wider purpose of the Agility of giving choices to the customers. The phrase "in the normal course of events" should be interpreted as a measure of probability, more likely than not. VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) applied to a contract where it was expected at the outset that ownership would ultimately pass, which was the present case for the Agility. Thus, the fact that a contract contained an option to purchase was not determinative of the issue. It followed that VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) did not apply to the Agility.
HMRC contended that the taxpayer made a supply of goods. It was the terms of the contract that determined whether VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) applied, not the wider commercial considerations. The phrase "in the normal course of events" was a qualification as to when ownership would pass, not to the exercise itself of the option. Furthermore, there was no requirement under VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) that the exercise of the option was more likely than not. VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) was directed at identifying when title normally passed under such agreements. The requirements of that provision were satisfied if the contract provided that in the normal course of events, ownership was to pass at the latest upon payment of the final instalment, which was the case for the Agility. Thus, VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) applied and VAT was chargeable at the outset of the agreement.
The Tribunal held that the description as a hire purchase, the provision for a deposit payment, the specified financial information including the cash price for the vehicle, the substantial capital payment inherent in the contract structure, and the option to purchase were compelling indicators of the Agility being a contract of sale of a car. The requirement regarding the maintenance of the vehicle was consistent with a characterisation of a sale contract, in that it preserved a customer's capital investment in the vehicle. The Agility was silent on the part-exchange option utilising the guaranteed future value of the vehicle. Examination of the terms of the Agility demonstrated that the return of the vehicle was the default position for the customers who lost their capital investment and incurred potential liability for additional charges for excess distance and damage if the vehicle was returned. The sole realistic option under the agreement was to purchase the vehicle. The term in the Agility allowing retention of title by the taxpayer until the exercise of the option to purchase mirrored the legal position under hire purchase. Thus, the Agility was a contract for sale of goods on deferred terms within VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b), under which the vehicle was handed over to the customers who had the option of purchasing the vehicle upon payment of the final instalment. It followed that VAT was chargeable at the outset of the agreement.
In respect of the phrase "in normal course of events" under VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b), the Tribunal preferred the construction that the possible passing of title was an essential feature of Agility, rather than an eventuality, which might only arise in limited and exceptional circumstances. That construction did not stray away from the governing principle that the application of VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b) was determined by the terms of the contract. As the option to purchase constituted the sole realistic option, the transfer of ownership was central to the Agility contract, not tangential. The phrase "in normal course of events" was directed at the legal realities of a contract for sale with an option to purchase. The phrase recognised that under the terms of such contract, ownership might not pass, but that possibility did not prevent the contract from being a contract for sale under which ownership normally transferred. Thus, the fact that ownership might not transfer under the Agility contract did not preclude it from being a contract for sale. The passing of title was central to the Agility, which meant that ownership would normally pass under its terms.
The Tribunal considered that even on the wider circumstances, the question of choice was illusory. The option of part-exchange still required the customers to purchase the vehicle beforehand. The option of return was still a default position which was largely governed by the environmental factors at the time of maturity. The rates of vehicle return under the Agility and hire purchase were very similar. The advantage of the Agility over hire purchase to the customer was that it involved lower monthly payments. This gave the impression that the Agility was a more affordable way of purchasing the vehicle. Thus, from a commercial perspective, Agility would be categorised as an affordable hire purchase product which carried no risks on the metal (the vehicle) for the taxpayer.
When a particular supply falls under the supply of goods on deferred terms within VAT Directive 2006, eu-directive 2006/112 subsec-or-para 2 article 14art. 14(2)(b), the taxpayer is chargeable to a lump sum of VAT at the commencement of the agreement. That VAT treatment is less advantageous than a supply of services where the taxpayer is chargeable each time he or she is liable to make a payment under an agreement for the supply. For commentary on the difference...
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