On 4 October 2017, the CJEU handed down its judgment in respect of Mercedes-Benz UK Limited's ("Mercedes") dispute with HMRC as to the VAT treatment of a type of leasing contract (the 'Agility' contracts).
The dispute centred around whether the 'Agility' contracts were considered supplies of goods or supplies of services for VAT purposes and is worth over £300 million.
For a supply of goods, VAT is payable up front on the whole of the contract value. For a supply of services, VAT is only due on a cash received basis.
The 'Agility' contracts
The 'Agility' contracts such as the ones in dispute, offered by Mercedes to its customers, are a hybrid variation of a hire-purchase agreement under which a customer makes monthly payments to Mercedes for the supply of a Mercedes vehicle, but the customer is not contractually obliged to make the final payment and ultimately purchase and take ownership of the vehicle. It is a genuine option for the customer to decide, particularly as there is a substantial payment at the end of the term to secure ownership (i.e. so that instalments paid during the term do not cover the purchase price).
Treating 'Agility' as a supply of services would provide a substantial cash flow benefit to the supplier.
Issues in dispute
The CJEU (following the Advocate General's opinion earlier this year) considered that transactions such as:
1. Conditional Sale (where ownership always passes at the end of the contractual instalment term); and
2. Hire-Purchase (where the instalments paid during the term are approximately the total purchase price (including finance), requiring only a nominal final payment to secure ownership)
were each supplies of goods for the purposes of VAT.
Article 14(1) of the Directive 2006/112 ("the Directive") provides a definition for a supply of goods as "the transfer of the right to dispose of tangible property as owner." As there is no specific definition provided for the supply of services, and in accordance with Article 24(1) of the Directive, a supply of services means "any transaction which does not constitute a supply of goods".
Therefore, it followed that only a transaction which actually corresponds to the definition set out in Article 14(1) of the Directive may be regarded as a supply of goods and all other transactions constitute a supply of services.
Leslie Allen, Head of Tax Litigation at Mishcon de Reya who is representing Mercedes, said:
"This is a fantastic outcome in what could be one of the last CJEU judgments relating to VAT from a UK referral. This is what we have argued from day one and it is great that the CJEU has agreed with Mercedes' analysis.
"This is now a very important time for others in the automotive and retail finance industry to consider any similar claims they have made or should now make."
Leslie Allen led the team advising Mercedes, alongside Dario Garcia and Waqar Shah. They instructed Pump Court Tax Chambers' Head of Chambers, Kevin Prosser QC.