”Some final payments or payments due at the end of the term of the agreements are called option payments. These payments are often very small, so it is very unlikely that the customer will not make the payment. In these circumstances, it is clear at the beginning of the contract that in the normal course of events, the title will occur. That`s why there is a range of products right from the start. On the VAT front, however, there are strong arguments that bad debts should benefit from revenue relief not only in the event of default under the CFP, but also where the market value is below the GMFV, given that PCP contracts treated as a supply of goods for VAT purposes should also share the VAT exemption for HP agreements. It is more common for the customer to return the vehicle or take a replacement. As a result, the purchase of a car under a PCP contract is considered a service as opposed to a supply of goods and should result in a lower VAT rate. Many companies offer HP contracts, the last tranche of which is a substantial amount (”balloon payments”), similar to those of PCP contracts, but the final tranche is not optional under HP contracts. These agreements usually have a much lower option fee for acquiring the asset, which must be paid (simultaneously) immediately after payment of the ball. If the option fee is significantly lower than the expected market value of the asset, these deliveries are not affected by the MBFS decision regardless of the amount at which the payment of the balloon is fixed. `When possession of property is transferred. in accordance with agreements that expressly assume that ownership will continue to exist in the future (determined or identifiable by the agreements, but at the latest upon full payment of the goods).
so, it is . Delivery of goods. » If you would like help with the accounting and tax treatment of PCP contracts, please contact us. The accounting treatment for the purchase of a car by PCP is different from a more traditional hire-purchase. PCP financing is characterized by relatively low monthly payments, which leaves a higher residual value at the end of the contract. Notwithstanding the fact that the Ministry of Finance`s PCP guidelines are silent on the availability of bad debts, they confirm that ”revenues are prepared to accept that a PCP can be treated as a delivery of goods, in the same way as a standard hire-purchase agreement, where at the beginning of the contract, the only economically rational choice for the customer is to purchase the vehicle at the end of the contract” vii. Therefore, on a comparable basis, all consequences and exemptions applicable to goods supplied under HP agreements must also apply to goods supplied under PCP contracts. Due to the COVID-19 crisis, the global automotive industry is facing an unprecedented challenge. In an attempt to manage the shrinking budgets of households, many people struggle with their monthly car payments as part of their HP or PCP deals. PCPs are a type of hire purchase agreement, usually for automotive contracts, that includes three distinct phases for the customer. Phase I – the down payment, which can usually be between 10% and 30% of the value of the car. Phase II – regular monthly repayments are spread over the duration of the contract, usually between three and five years. Unlike HP contracts, payment of the final amount due under the contract does not result in the transfer of ownership to the customer.
Payment of the final amount leads to Phase III – a choice between one of three end-of-term options: ”When ownership of the assets is transferred. under agreements that expressly provide that ownership will also take place at some point in the future (determined by or from the agreements, but in any case at the latest when the goods have been paid for in full). then it is. a supply of goods`. If you would like help with the accounting and tax treatment of PCP agreements, please contact us. The accounting treatment for the purchase of a car by PCP is different from a more traditional hire-purchase. PCP financing is characterized by relatively low monthly payments, which leaves a higher residual value at the end of the contract. The residual value is payable by the customer only if he exercises the option to purchase the vehicle. Grant Thornton`s guidelines highlight Ireland`s VAT rules, which provide that the letting of goods takes place for a certain period of time, including the condition that ownership is transferred at some point at the latest for final payment. There is evidence that ownership of the vehicle is not included in most PCP agreements.
It is more common for the customer to return the vehicle or take a replacement. Therefore, the purchase of a vehicle under a PCP contract is considered to be a supply of services as opposed to a supply of goods and should result in the lower VAT rate. Simply put, a hire-purchase agreement therefore expressly provides that title is transferred at the end of the contract term, while leasing contracts with high lump sum payments, for example, can also end when the tenant leaves the contract. This issue is discussed in more detail in vatSC10172: Although PCP agreements are a bit more complicated than HP agreements, the guidance provided by recipes to PCPs is not as comprehensive as those provided for HP. Prior to the COVID crisis, automotive industry feedback revealed that less than 2% of PCP customers exercised option (i) the return option, which could indicate that the issue of bad debts has not yet been raised to a volume that would require revenues to consult on these issues at the insistence of the industry and update their pcP advice accordingly. Financial companies that supply cars in PCP are entitled to full deductibility with regard to their car purchases. If, on the basis of the terms of the PCP, it is considered that the contract constitutes a supply of goods, the financing by exempt credit affects the ability of the finance house to deduct the VAT incurred on the overheads. As with HP agreements, the method of allocating VAT to these costs is agreed with Revenueiv. The Irish Tax Guidelines on VAT and Hire-Purchase Agreements stipulate that financial institutions are entitled to pro-rata relief from hire-purchase transactions in the event of default in relation to the VAT element of unpaid payments.
If a hire purchase agreement is terminated prematurely and the vehicle is returned to the property of the financial home, relief from the claim may be requested in respect of the VAT portion of the unpaid payments (subject to the application of formulas to deduct the value of interest from the amounts paid so far, as well as unpaid amounts to determine the value of VAT on bad debts). While credit institutions and car finance providers (”financial houses”) have responded by offering customers PCP payment holidays of up to three months, with arrears recovered by distribution over the remainder of the PCP term, extending the term for an additional three months or increasing the final lump sum payment, and with some institutions also extending this relief to HP agreements, the volume of customers who default beyond the three-month vacation period while struggling to meet monthly payment terms is likely to increase. Companies must prove in their business and accounting records how they arrived at the numbers they use. ”A series of final payments or payments due at the end of the contract period are called option payments. These payments are often very small, so it is very unlikely that the customer will not make the payment. Under these conditions, it is clear at the beginning of the contract that the title is passed in the normal course of the event. That is why there is a delivery of the goods in advance. Therefore, a lease expressly provides that title expires at the end of the contract, while leases, at para. B example with high lump sum payments, can also end with the termination of the contract by the tenant. This issue is discussed in more detail in VATSC10172: Grant Thornton`s Guidelines refer to Irish VAT rules which provide that the letting of property takes place for a certain period of time, including the condition that the property is transferred at the latest at a time after final payment. There is evidence that vehicle ownership is not included in most PCP agreements. This article only provides a general overview of some of the effects of defects and repossession of vehicles under HP or PCP agreements.
We`d be happy to discuss how this will affect your business in concrete terms. The special rules for the implementation of bad debts under HP agreements require that a debt be owed under the agreement. The claims collection procedure for HP contracts takes into account the total amount paid by the customer with the (largely) 36 installments provided for payment under the HP contract. With PCP contracts, it is also possible not to make payments in instalments, but if these installments are paid in full, only 60% of the value of the vehicle can be paid to the financial house. The outstanding amount is the GMFV, but since it is not an amount intended for payment and is completely discretionary (subject to a choice of option (ii), does its non-payment by the customer at the end of the financing period constitute a bad debt? The PCP is included mainly to finance the purchase of new cars, although it is available for some used cars. .