Croner Taxwise’s VIP tax question of the week: “Are hire purchase agreements categorised as goods or services for VAT purposes?”, answered by Tony Chamberlain, VAT Adviser.


“I have a client who bought a van on HP for £50,000 + VAT. They recovered the £10,000 of VAT up front on the basis that it should be treated as a supply of goods. HMRC have queried the client’s VAT recovery because the agreement refers to ‘period of hire’ and has an ‘option to purchase’ of £100 at the end of the agreement. They are arguing that because the agreement is termed as a hire, and there is an option payment, that this is a service and so VAT is only recoverable on the monthly payments. Are they correct?”


The HMRC officer reviewing this agreement appears to be taking the wording of the agreement too literally, rather than following what the legislation outlines. Schedule 4 of VAT Act 1994 states:

1(2) If the possession of goods is transferred–
(a)under an agreement for the sale of the goods, or
(b)under agreements which expressly contemplate that the property also will pass at some time in the future (determined by, or ascertainable from, the agreements but in any case not later than when the goods are fully paid for), it is then in either case a supply of the goods.

It is quite clear that the agreement that your client entered into ‘expressly contemplates’ that title will transfer upon full payment, and a final balloon payment as little as £100 for goods worth £50,000 + VAT is not likely to put a person off making that final option payment.

Indeed, HMRC’s own internal manual confirms this in VATSC10172:

“Some final payments, or payments due at the end of the term of the agreements, are referred to as option payments. These payments are often very small such that it is very unlikely that the customer would not make the payment. In these circumstances, it is clear at the outset of the contract that in the normal course of events title will pass. Therefore, there is a supply of goods at the outset.”

As a result of the above and assuming the client is a taxable business and holds the appropriate VAT invoice (in this case, the HP agreement) as evidence, their recovery of the VAT up-front is correct.

There are a range of other finance options available, some of which have much larger balloon, or option payments. One of the most common is Personal Contract Purchases (PCP). The above-mentioned legislation still applies, where it is ‘expressly contemplated’ that title will transfer.

However, a larger balloon can bring into question whether that can really be said to be the case. Again, VATSC10172 provides further insight into this:

“A judgment must be made by the supplier at the outset of the contract as to what the customer, acting as a rational economic actor, would do when entitled to exercise the option. If the customer could profitably sell the asset for more than the cost of the final optional payment, then if they act rationally it can be expected that they will buy the asset. However if the optional payment is expected to be the approximate open market value of the asset (or more) at the time the option must be exercised, then the customer may equally choose to purchase the asset, or return it. Under such circumstances it is not the case that in the normal course of events title is to pass.”

Further guidance on larger balloon payments for PCP contracts can be found in Revenue and Customs Brief 1 (2019).

Information taken from

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