HMRC have announced a change to the way that VAT is applied to personal contract purchases (PCPs), which could greatly impact the car finance market. The change will impact customer purchases and car dealerships will need to adapt the way it sells these services to customers.

The change in simple terms puts a PCP, where customers pay monthly for a car with an option to buy at the end of the term, on the same footing as a personal contract hire (PCH), whereby the customer just leases the car, with no buy out option at the end.

Currently, a PCP is treated as a supply of goods, whereas a PCH is regarded as a supply of services. The new HMRC rules will in most cases, treat both as a supply of services, therefore altering the VAT payable.

The current VAT position of a PCP is that VAT is payable on the full sales price at the initial handover of the car. However, the new rules mean that if the final instalment paid by the customer is similar to the open market value of the vehicle, then VAT is only payable on the money that the customer has actually paid to the finance company and only at the time the payments are made. Interest on PCPs is currently VAT exempt, but the future changes mean that they will be seen as part of the payments made by the customer and will attract VAT in the same way.

The change is likely to have a significant impact on the retail car sector, particularly the used car market. The new rules are advantageous in respect of the fact that VAT is not payable until customers make their payments and VAT will be reduced where a car is handed back at the end of the term.

However, the disadvantages of this largely relate to VAT being payable on the full selling price of the car at the end of the PCP deal, which is the same position as with PCHs. This means that dealers and customers alike will need to come to terms with most cars being liable to VAT charges.

Commenting on the change by HMRC, Geldards Partner Jonathan Butler, said:

“The automotive sector faces challenging times, dealers need to be aware of these important changes and the impact that they will have on their businesses and on consumers”

If you require any advice on this issue, please contact Jonathan Butler or any other member of the Automotive team.

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