Home Insights Personal contract purchase arrangements – the tax consequences

Personal contract purchase arrangements – the tax consequences

By Ensors Team
22nd Jan 2018

The availability of PCP vehicle financing arrangements is likely to increase following Mercedes’ success in their VAT case at the ECJ. These arrangements offer customers flexibility, but the position for business purchases is not as simple as it appears.


The ECJ ruled that Mercedes PCP contracts are a provision of services not goods, meaning VAT is charged on each lease payment rather than up front.

ECJ advice is that PCP arrangements must be considered on their merits. In the Mercedes case the final purchase payment represented a substantial percentage of the vehicle’s value.  If the final payment is a low percentage, the contract should be for the provision of goods, with VAT charged up front. What’s not clear is the point at which the final payment becomes significant enough to fall under the “Mercedes” scenario.


Many PCP arrangements should be accounted for as operating leases rather than hp. Under hp it is agreed at the outset that title passes at the end of the arrangement. In a PCP arrangement it can be unclear at the outset whether the option to purchase will be exercised. That is certainly true where the final payment represents a high percentage of the vehicle value.

In contrast, if the final payment is significantly below market value the arrangement could be treated as HP, meaning that the vehicle is included in fixed assets.

Direct tax

Tax follows the accounts, so where the arrangements are treated as operating leases the lease payments are deductible (subject to adjustment for high emissions cars). On the other hand, for vehicles capitalised as HP, the option to purchase means that the business can claim capital allowances.

If your business is considering entering into a PCP arrangement please do get in touch with either myself or Corporate Tax Partner Katie Varney and we will be happy to help you understand the accounts and tax position for your particular deal.