VAT Notice 701/49: Finance has been updated and highlights where some HP agreements may be reclassified meaning each that installment is taxable.
It states that ‘Some Personal Contract Purchase (PCP) or similar contracts may be described as HP. If they contain a contractually optional payment exercisable at the end of the contract, which at the outset of the contract is set at or above the anticipated open market value of the asset at the time, the option will be exercised.
They are treated as a supply of leasing services. There is therefore no supply of credit and the full value of each installment is taxable - even if part of the fee is shown as credit in the agreement.’