Auto finance companies need to ensure they adopt a sensible approach to residual value setting in response to UK government changes to the way VAT is applied to personal contract purchase schemes, experts believe.
The warning from Startline Motor Finance comes after the government announced that certain PCP deals could be reclassified to become a supply of services, starting in June.
This means that where the final instalment or balloon payment being set is approximate to the vehicle’s market value, interest on PCPs will no longer be VAT exempt. Also, ex-PCP used cars that have been reclassified as leases sold by dealers will now attract VAT on their full selling price.
The change follows a European Court of Justice ruling on a legal wrangle between HM Revenue & Customs and Mercedes-Benz Financial Services over its ‘Agility’ product.
At the heart of the row was how to interpret at key part of VAT rules on whether PCPs are a supply of goods or services.
Previously, HMRC regarded them as goods, with a separate supply of credit. Following the ECJ ruling in favour of MBFS, tax rules have been amended and consider that some of these contracts can be seen as a single supply of taxable leasing services.
Paul Burgess, chief executive officer of Startline, said: “There has been some degree of consternation about this in the market but the key is that the changes only apply where, to use the HMRC’s wording, ‘the final optional payment is set at or above open market value.’
“What this means, according to our reading, is that the move is very much designed by the Government to discourage the setting of overoptimistic future values for PCPs.”
He said that the new rules risked creating new costs, but this could be avoided by simply setting more conservative residual values.
“To put this into context, we set our future values at 85% of the forecast future trade value of the vehicle, which is a level that is consistent with many other responsible lenders,” Burgess said. “Therefore, as long as sensible balloon payments are set, the effect will be limited.”
He added: “What might happen is a further reduction in some of the aggressive PCP pricing that has been seen in the market, but this has been much reduced in recent years anyway.”
Startline launched its first PCP last year, targeting the used car market. It is designed to be offered by dealers alongside traditional prime lenders and suggested as an alternative source of funding when applicants are declined.
Burgess said: “Our PCP has found its own niche and a high level of success very quickly. We believe that the HMRC ruling will have little or no effect on its rate of take-up.”
Startline recently announced the creation of up to 50 new jobs as the business transfers its customer services function in-house. The move will also see a doubling of office space at its headquarters in Glasgow.
Startline is undergoing a period of rapid expansion. During 2018, it doubled the number of staff employed to 80 as business volumes increased more than 20%.
The business is a specialist in the ‘near prime’ motor finance sector, providing products that are designed to be used when a mainstream prime lender declines an applicant.
* Pictured: Paul Burgess (left), CEO, Startline, with Gregor Sutherland, COO, outside the company's Glasgow headquarters
