HMRC is to change the way VAT is treated on vehicles sold using PCP as the customer’s finance option. Effectively the change means that PCP sales in most cases will be classed as a supply of services rather than a supply of goods.
The change will mean that VAT will be charged on the rentals rather than the vehicle itself, ultimately leading to higher payments for the customer. The reasoning behind this change is that a customer can enter into a PCP agreement and whilst being able to pay the deposit and the monthly instalment, they know at the outset that they cannot afford the final payment, so at the end of the agreement they simply hand the vehicle back and walk away. In this instance there is no perceivable difference between how PCP and PCH works.
The difference for dealers is how HMRC will treat the VAT, and as in the case of PCH, VAT will be payable on all of the PCP rentals. This will eventually wash-out into the used car market with these cars ending up as VAT qualifying vehicles, ultimately leading to higher used car prices. Will this lead to an increase in PCH? Time will tell.