Case summary: the European Court has recently given its judgement in the Mercedes-Benz case as to whether its Agility finance agreement was a supply of goods or services
The European Court has recently given its judgement in the case of Mercedes-Benz Financial Services Ltd. The case concerned whether in supplying cars it was making a supply of goods, or a supply of services. If there was a supply of goods such as under a traditional HP agreements VAT was due on the full value of the supply up front. If there was a supply of services such as under a traditional leasing agreement then VAT was only due each time an instalment was paid.
The Mercedes-Benz agreement involved a customer making instalment payments with a final “balloon” payment at the end and therefore looked very much like a traditional HP arrangement. But the instalment payments only covered 60% of the price with the final balloon payment making up the remaining 40%. The Court held where a customer had a genuine economic alternative as to whether to exercise their option to buy the vehicle and make the balloon payment there was a supply of services and therefore VAT was only payable as each instalment was paid.
By contrast if the final payment had been small and the only economically rational choice was to make it and acquire the vehicle it would have been a supply of goods. Other suppliers engaged in supplying goods on finance may wish to consider whether they can bring their sales into a similar position and achieve a VAT cash flow saving.