Price increase for PCP deals?

A little known recent EU Court judgement means that monthly PCP (Personal Contract Purchase) payments could rise by 20% for VAT.

The European Courts have re-interpreted the rules relating to VAT on finance agreements, and as a result certain types of PCP agreement will be treated like leases for VAT purposes. In other words, VAT will apply to the monthly payments.

Where and when?

The rules have just come into force (from June 2019) and they only relate to a particular type of PCP finance. PCH (Personal Contract Hire) finance is already subject to VAT, so it isn't affected by the rule change. Like all VAT rules, watch out for the small print and exceptions/exclusions.

What's happened?

PCP works by setting aside part of the purchase price of a car or van until the end of the finance agreement. The amount set aside becomes a final or 'balloon' payment at the end of the deal.

The customer makes monthly repayments of the forecast depreciation in the value of the vehicle over the life of the PCP agreement, plus interest.

Normally the value of the vehicle at the end of the PCP agreement is expected to be more than the final finance payment, so the customer will have some money left over after finishing the agreement and can roll this surplus cash (or equity on the car/van) into a new vehicle.

However, this relies on the forecast final value being less than the real expected value of the vehicle at the end of the contract. This in turn makes the monthly payments more expensive, because the customer has to pay back more in depreciation each month.

Now, more recently (and perhaps in response to increasingly desperate market conditions), some providers of PCP products have closed the differential between the forecast future value and the amount to be repaid at the end of the agreement.

In effect the agreement makes the final payment much closer to the likely market value at the end of the deal.

Doing this brings down the monthly PCP payments and makes the deal look more attractive to customers, because it reduces the repayment of depreciation.

As a result of future values and final repayments being brought closer together, there is less likelihood of the customer having money left over to roll into a new vehicle, so the customer could be argued to be more likely to simply hand back the vehicle and walk away at the end of the agreement.

And this feature makes such PCP deals more like Personal Contract Hire and therefore, according to the European Courts, liable to VAT.

What does this mean for PCP?

Well, in practical terms it probably means an end to PCP deals where the final payment at the end of the agreement is at or above the expected future value of the vehicle. As a result, the monthly cost of repayments in a PCP deal could go up as suppliers try to second guess HM Revenue & Customs (who will police the new rules) on what a car or van's future value will be to avoid falling foul of the VAT Inspector.

What are the normal PCP options?

At the end of a PCP deal a customer can normally either:

1.    hand back the vehicle and walk away from the finance deal (assuming the car or van meets the condition and mileage requirements of the deal); or

2.    pay the final balance of the outstanding finance and take ownership of the vehicle, perhaps to keep it or to sell it as a trade-in against a new vehicle.

In future, the first example will be much less likely to arise because finance suppliers will have to set the final payment sufficiently below the expected future value of the vehicle to avoid crossing the VAT rules.

This in turn means more depreciation has to be repaid by the customer in the PCP instalments each month in order to make up the difference in value, and therefore makes the monthly PCP payments more expensive in comparison to an equivalent PCH deal.

What will happen next?

Watch for the monthly costs of PCP deals rising to ensure that more of the vehicle's value is repaid before the end of the finance agreement, with a bigger incentive for customers to either keep their vehicle or sell it privately to cash-in on the surplus equity.

Or just opt for PCH instead.

#PCP #PCH #CarTax #VAT #fleetcars #automotivelegislation