Mercedes-Benz Financial Services UK Ltd - Contract Hire - A supply of goods or services?

October 2017

The longstanding orthodoxy on credit sale type transactions is that the supply is one of goods where the contracts contemplate title to the goods passing to the 'consumer' on completion of the credit terms (e.g.) Hire Purchase); and that the supply is one of services where the contracts do not contemplate the transfer of title.

The significance is that , in the case of a supply of goods a tax point for the full sale value is created when the credit agreement is entered into.

Mercedes-Benz Financial Services UK Ltd (MB) offered various vehicle financing options. One particular product, 'Agility', offered consumers an option to purchase their vehicle at the contract end. Typically consumers would have to pay 40% of the vehicle's residual value if they wished to take up the option.

MB argued that the product could not be treated as a supply of goods because it was unknown at the time the agreement was signed whether the customer would purchase the vehicle. Following their defeat in the upper tier, HMRC had appealed and the Court of Appeal had requested a preliminary ruling to assist them in considering the matter of whether the supply of a vehicle finance agreement with an option to purchase constituted a supply of goods or services.

The ECJ held that it must be inferred that the supply was of goods where the 'option to purchase' was the only rational choice open to the consumer at the contract's end.

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