I have a client who bought a van on hire purchase (HP) for £50,000 plus VAT. They recovered the £10,000 of VAT up front on the basis that it should be treated as a supply of goods.

HMRC has questioned the client’s VAT recovery because the agreement refers to ‘period of hire’ and has an ‘option to purchase’ of £100 at the end of the agreement. HMRC is arguing that because the agreement is termed as a hire, and there is an option payment, that this is a service and so VAT is only recoverable on the monthly payments. Is that correct?

The HMRC officer reviewing this agreement appears to be taking the wording of the agreement too literally, rather than following what the legislation outlines. Schedule 4 of VAT Act 1994 states: