Sales of goods and 0% financing deals – What is the VAT assessment base?
Issue – Sale with a 0% financing deal
A retailer sold goods to diverse customers and offered them so-called 0% financing deals where despite paying in instalments the customers only paid the price for the goods that they had purchased. To this end, the retailer concluded a “General Credit Intermediation Agreement” with a bank. Under this agreement, the bank assumed all the new financing deals from the sale of goods that had been brokered to customers. As a result, a loan agreement was concluded between the customers and the bank.
Purchase contracts were concluded between the retailer and its customers for the items that were to be financed and there the purchase price was included as an overall amount. The retailer issued invoices to the customers where the net amount was mentioned and the respective VAT payable on this amount was shown. Furthermore, the invoices included a reference to the “0% instalment plan” method of payment whereby the financing amount corresponded to the overall amount. In the invoices the retailer reported an amount that was termed a discount, which was paid directly to the financing bank and reduced the assessment base of the goods supply accordingly. However, there was no entitlement to receive the discount as a cash payment.
In its VAT returns the retailer reduced the taxable revenue by the financing fees – the local tax office rejected this. The action challenging this move was unsuccessful.
Decision of the Hesse tax court – ancillary services
The Hesse tax court, in its ruling from 12.2.2019, (case reference: 1 K 384/14) decided that the cases of 0% financing deals did not constitute services that had to be assessed separately for tax purposes. The financing and its assumption constitute ancillary services for the taxable supply of the purchased goods as the main service. In the opinion of the judges, the financing did not fulfil a separate purpose for the customers rather the aim was merely to consume the deliveries under optimum conditions. Moreover, the tax court did not see any parallels here with price reductions in the form of cash rebates or discounts that normally result in a reduction of the assessment base.
Recommendation: The appeal is pending at the BFH (case reference: XI R 15/19). For businesses that are affected it is recommended to follow the test case and await the supreme court ruling in this respect.