News added on 26.06.2019

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VAT

New VAT rules for personal contract purchases

Personal contract purchases. Following a ruling by the Court of Justice of the European Union, HMRC has issued new guidance on the VAT treatment of so-called personal contract purchases (PCPs). These are most frequently used for cars and vans bought by individuals. While it’s the finance companies who will need to decide when and how much VAT to charge under the new rules, this will have a knock-on effect for self-employed individuals and business partners.

What’s changed? Until now, payments under a PCP were a mix of standard-rated supplies for the cost of the vehicle etc. and exempt supplies for the cost of the finance, i.e. interest etc. This will continue to be the position where the amount of the final payment (sometimes referred to as the balloon payment) under the contract is a relatively small proportion of the vehicle’s price. But for PCPs starting from June 2019, if the balloon payment is greater the VAT treatment follows that of lease hire contracts, and the finance company must charge standard-rate VAT on the whole payment due under the agreement.

Reclaiming VAT. As the purchaser you can leave the finance company to worry about how much VAT should be charged but remember that where it treats the contract as a lease you’re entitled to reclaim some or all of the VAT charged.

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