Change to VAT treatment of PCP deals

Change to VAT treatment of PCP deals

Following a ruling by the European Court of Justice in 2017 involving Mercedes-Benz Financial Services, HMRC have implemented a change to the VAT treatment of PCP vehicle sales. The change took effect on 1 June 2019 and is likely to have a marked impact on customers and dealers alike.

Previously PCP deals were, by default, treated as a supply of goods and VAT would be due on the full sales price at the time of sale. However, the new rules mean that the VAT treatment will now be dictated by reference to the amount of the final balloon payment required to own the car at the conclusion of the deal:

  • Where the balloon payment is set at or above market value, a supply of leasing services will be indicated and VAT will only be due on the instalment amounts the customer actually pays at the time of the payments.
  • Conversely, if the balloon payment is below market value this will indicate a supply of goods and VAT will be due on the car’s sales price at the time of sale.

This change recognises the fact that the majority of customers do not make the final balloon payment and opt to return the car to the dealer instead. Under the old rules customers were effectively receiving a supply of leasing services but suffering VAT as if they had received a supply of goods.

We can assist your business to adapt to these changes and implement processes to ensure the correct VAT treatment is adopted from the outset of any PCP or similar deal. If you would like to discuss any aspect of the change in further detail please contact Tom Davies – tom.davies@kilsbywilliams.com.