Market leading insight for tax experts
View online issue

VAT and semantics

printer Mail

If I ask you to define what is meant by something happening ‘in the normal course of events’, you might think it was a simple point. But does it mean that the eventuality is something that would happen more often than not, that is almost always happens, or that the happening might be an unlikely but nonetheless possible outcome? If we stop to consider these three choices, we see that they cover a wide range between a very likely outcome and an unlikely outcome.

Now, most people I think would have picked the first choice, namely that there is a presumption that it would probably happen but not that it was almost certain. The second most likely choice would be that in only a few cases the outcome would fail to come to pass. But how many would choose the view that it could encompass a situation where the outcome was possible but probably unlikely? Few, I think.

Well, HMRC is one of the few. The issue concerns the provisions of article 14 of the Principal VAT Directive, regarding hire of goods where ‘in the normal course of events’ the title to the goods would pass to the customer. HMRC argued this this must cover contracts which gave the possibility that the title would pass, not where it was the expected outcome. Under this interpretation, the mere fact that the contract provided for the possibility would make the supply one of goods (which would cause VAT to fall due on the full value at the time the goods were delivered). Interestingly, the First-tier Tribunal agreed with this view. However, the Upper Tribunal reversed the decision (Mercedes-Benz Financial Services UK [2014] UKUT 0200 (TCC)), saying that ‘it is not concerned with every contract under which there is a possibility of the ownership passing, but only with those contracts where this can be described as the normal outcome’.

This left the dilemma of how to determine the ‘normal outcome’ without keeping records of customer choices. The Upper Tribunal took the view that one looks at the ‘economic purpose’. In this case, Mercedes offered customers a lease with a purchase option at the end of the lease term, in which the consideration for the hire was a fair price for an operating lease, and the customer could pay a fair price to keep the car at the end. The customer had a straight choice and was theoretically as likely to buy as not to buy. The economic purpose was not to transfer effective ownership at the outset, but to defer that choice until later. Title would not, therefore, pass as a normal course of events.

Simple, but apparently difficult at the same time.