Andrew Needham looks at the VAT implication of selling goods on interest-free credit.
There are two ways retailers can finance interest-free credit; self-finance (i.e. where the retailer simply collects payment over an agreed period of time) and finance provided by a third party finance house.
In the latter case, the finance house makes a charge to the retailer for providing ‘interest-free’ credit to their customer.
Retailer-provided credit
If retailers provide the credit themselves they can show the credit charge separately on the invoice it issues to its customer, it will be exempt from VAT and it can reduce the amount of VAT due.
When the customer pays the advertised ticket price the retailer pays the finance house for providing the interest-free credit and this is normally done by the finance house retaining their share and paying the balance over to the retailer. In these circumstances the retailer receives less that the advertised ticket price.
Example: Finance house arrangement
A retailer sells goods for £1,000. The finance house charges the retailer £100 for providing their customer with interest-free credit so the retailer receives £900 for the goods.
How much VAT is due?
In the above example, is the value of the sale by the retailer for VAT purposes £900 or £1,000?
The leading case on this is Primback Ltd (ECJ C-34/99; [2001] STC 803). The tribunal held that the value of the goods was that invoiced to the customer. The deduction by the finance house was for interest. The High Court agreed, but the Court of Appeal said the VAT was only due on the sum actually received by Primback via the finance house. The House of Lords then referred the matter to the ECJ, which held that the value of the sale was that agreed between Primback and its customer.
The Court found it important that the price did not vary whether the customer paid up front or by instalments through the finance house, and that the customer was unaware of the charge made by the finance house to Primback.
Although Primback might allow a discount for immediate payment, it did not offer this; the customer had to ask for and negotiate it, and it would, therefore, not necessarily be the same amount as the commission charged by the finance house. The Court saw that commission as an expense of Primback incurred in order to increase its sales and to avoid having to accept payment by instalments.
Therefore, in the above example the retailer would have to account for VAT on the £1,000 ticket price not the £900 he actually receives.
Are there ways of reducing the VAT?
If a business structures the sales agreements correctly it can reduce the VAT due on interest-free sales financed by a third-party finance house.
The retailer should sell the goods to the finance house at a reduced price (the discount being the same as the interest that would be charged by the finance house), and for the finance house to then sell the goods on to the customer at the retail value.
In the case of A&D Stevenson (Trading) Ltd v Customs and Excise [2002] UKVAT V17979 (8 November 2002). HMRC’s arguments based on Primback were rejected, and a conditional sale agreement was held to involve a sale by the dealer to the finance company, the value of the supply being the sum the retailer actually received (i.e. it was net of the interest charged, not the full sale price agreed with the customer).
Practical tip
If a business sells goods on interest-free credit it can reduce the VAT due by having a conditional sale agreement with the finance house.
