Car lease arrangement

Is the option to buy a supply of goods or services?

The taxpayer entered into motor vehicle finance agreements with customers who received the use of a car in return for monthly payments and could choose to buy the vehicle at the end of the term.

HMRC said each agreement was a supply of goods. They issued VAT assessments on the basis the tax was chargeable on the full cost of the car when the agreement was made. The taxpayer argued that the arrangement was a supply of services and VAT was chargeable on each monthly payment.

The First-tier Tribunal dismissed the taxpayer’s appeal but the Upper Tribunal said the lower chamber had made an error of law in its interpretation of article 14(2)(b) of EU Directive 2006/112/EC (supply of goods). The Upper Tribunal judge decided the agreement could not be characterised as a contract for the sale of...