Revenue and Customs v Mercedes-Benz Financial Services UK Ltd

For VAT, classification of a hire contract under Article 14(2)(b) must be assessed at the contract date by reference to the contract and objective EU-law principles. Contractual terms normally reflect economic and commercial reality, but subjective intentions and hindsight are excluded. The Court held that it was unclear whether the relevant phrase is satisfied by an option to purchase exercisable by the final instalment, or whether the contract’s economic purpose must be examined by reference to the interests satisfied by performance. With no direct CJEU guidance, the issue was not acte clair. The Court therefore required a reference to the CJEU and left the substantive VAT classification unresolved.

HMRC appealed from the Upper Tribunal (Tax and Chancery Chamber), which had reversed the First-tier Tribunal’s treatment of Agility hire-purchase contracts as supplies of goods and had concluded that they were not within Article 14(2)(b) of the Principal VAT Directive (2006/112/EEC). The contracts gave customers use of vehicles for 36 months, required monthly instalments, and offered a final purchase option based on residual value. The central question was whether the contracts were supplies of goods or services, and whether the phrase requiring ownership to pass in the normal course of events required only an option exercisable by the final instalment or a wider economic-purpose analysis. The decisions below were reported at [2014] UKUT 200 (TCC) and [2013] UKFTT 381 (TC).

The Court gave a judgment of the Court and did not finally determine whether the Agility contracts were supplies of goods or services.

1. Applicable principles. The classification under Article 14 had to be determined at the date of the contract by reference to its provisions. It was an objective question of EU law. Contractual terms were relevant because they normally reflected economic and commercial reality, although purely artificial arrangements could require a different analysis. Subjective intentions and hindsight were excluded.
2. Competing interpretations. HMRC contended that Article 14(2)(b) was satisfied whenever the contract contained an option under which ownership could pass no later than payment of the final instalment. MBFS contended that the court had to identify the contract’s economic purpose by examining the parties’ respective interests satisfied by performance. The existence of an option and the fact that acquisition might be a normal outcome did not resolve which interpretation was correct.
3. Economic-purpose approach. The approach derived from the Advocate General’s opinion in Customs and Excise Commissioners v Mirror Group plc and Customs and Excise Commissioners v Cantor Fitzgerald International, and cited in Tesco plc v Customs and Excise Commissioners, focused on the precise way performance satisfied the parties’ interests. The Court noted that those authorities concerned the leasing or letting exemption in Article 13B(b) of the Sixth Directive. It remained uncertain whether that approach applied to the deeming provision in Article 14(2)(b).
4. Reference. There was no direct CJEU guidance on the issue and the competing interpretations meant that it was not acte clair. The Upper Tribunal was wrong not to refer the question. The Court required guidance from the CJEU, including consideration of HMRC’s timing argument concerning when classification should be determined, and invited the parties to agree the questions for the reference.

• Court of Appeal (Civil Division): on HMRC’s appeal, held that the interpretation of Article 14(2)(b) was not acte clair, required a reference to the CJEU, and left the substantive classification unresolved: [2015] EWCA Civ 1211.
• Upper Tribunal (Tax and Chancery Chamber): on appeal from the First-tier Tribunal, held that the Agility contract was not within Article 14(2)(b): [2014] UKUT 200 (TCC).
• First-tier Tribunal (Tax Chamber): preferred HMRC’s construction and treated the passing of ownership as central to the Agility contract: [2013] UKFTT 381 (TC).