VATSC06530 - Consideration: Payments that are not consideration: Payments in specific sectors: Oil Industry
The UK Oil Industry Taxation Committee (UKOITSC) and Customs and Excise discussed the VAT implications of a number of typical marketing agreements under which oil companies make payments to dealers. It was agreed that the vast majority of such payments are outside the scope of VAT.
For example, payments which are repayable, either directly or by adjustment of rebates, are considered to be the principal sum in a loan or an advance of credit. Payments which are not repayable, other than in cases of default, are likely to be an adjustment of rebate under a supply agreement or a conditional gift of money for which nothing is supplied by the dealer.
If, however, a payment to a dealer is expressed as being in consideration of the dealer entering into a new or revised supply agreement then the dealer will be making a taxable supply and must account for output tax.
It was also agreed that free loans of dealer equipment are outside the scope of the tax.
Whereas some of the types of agreement discussed below specify that a legal charge or security will be secured, that practice varies from company to company, and agreement to agreement.
For guidance on incidental supplies see PE1400.
| Type of Agreement | Agreement details | VAT Treatment |
|---|---|---|
| A: Substitution of higher rate | Oil company agrees upon commencement of new supply agreement to pay higher rebate to dealer. | Outside the scope: payments by oil company and repayments by dealer. |
| B: Advance of Rebate | Oil company agrees to pay a lump sum as an advance payment of rebate. Proportion of rebate repayable if ceases business etc. before expiry of supply agreement. | Outside the scope: payments by oil company and repayments by dealer. |
| C: Additional rebate paid at year end | Where dealers’ purchases of fuels exceed certain fixed annual limits, an additional rebate is paid annually in arrears. | Outside the scope: payments by oil company and repayments by dealer. |
| D: Supply of loaned dealer equipment (LDE) | Oil company agrees to supply certain loaned dealer equipment (pumps etc) on loan at nil charge for duration of supply agreement. Oil company bears part of cost of installation of loaned dealer equipment. | Outside the scope: payments by oil company and repayments by dealer. |
| E: Annual payments - in advance | Oil Company agrees to pay dealer upon entering into the supply agreement an annual sum depending upon quantity of motor fuels purchased. Sums repayable if supply agreement terminated early. Oil company takes security. | Outside the scope: payments by oil company and repayments by dealer. |
| F: Annual payments - in arrears | As for E except that monies are not made available until 1st anniversary (and so on) of supply agreement. | Outside the scope: payments by oil company and repayments by dealer. |
| G: Loan | Oil company grants dealer a loan charging commercial rate of interest. Legal charge/security taken over immovable property. Principal plus interest paid periodically. | Under the agreement an exempt supply of credit is disregarded for partial exemption purposes. However,the agreement was based on the partial exemption rules in force prior to 1 April 1987. Currently, interest received will be excluded from outputs-based partialexemption calculations if the supply is incidental to the trader’s business. This is likely to be the case in most of the instances outlined in this agreement. However, thesupply of HP credit as a principal is unlikely to be incidental under current partialexemption rules. If you encounter such a supply, please contact VAT Deductions and Financial Services Team, who will advise on the correct position based on the circumstances of each case. |
| H Loan payable in instalments | As for G except that oil company makes loan principal available in instalments. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| I Loan with moratorium on repayment of principal | As for G except that only interest paid monthly, principal repaid at end of loan period. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| J Annual payments in advance for capital improvements | As for E except that monies linked to capital improvements to be effected by dealer. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| K Annual payments in arrears for capital improvements | As for J except that monies paid on 1st etc anniversary of supply agreement. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| L Other Assistance (OA) Payment | Oil company agrees upon entering into the supply agreement to pay a specified sum as financial assist to dealer. Such monies repayable if supply agreement terminated early. Oil company makes legal charge/security. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| M Other Assistance (OA) payment for improvements | As for L except that OA payment contractually linked to certain capital improvements to be effected by the dealer. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| N payment for improvements payable in stages | As for L and M except that monies paid over to dealer only against certified records of development work. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| O OA payment | Rolled over from earlier commitment - as for L. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| P Rollover option annual payments in advance | Oil company makes initial payment to dealer and undertakes to make subsequent payments when supply agreement entered into and when through-put reaches certain limits. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| Q Rollover option - annual payments in arrears | As for P except that future payments to be made annual on 1st etc. anniversary of supply agreement. | Repayment of principal: outside the scope.Payments by oil company:either outside the scope if subsequent to dealer entering into supply agreement, or taxable if expressed as consideration for dealer entering into supply agreement. Any repayment by dealer: outside the scope. |
| R: Supply of equipment on HP | (1) Oil Company supplies equipment (pump etc.) on HP including finance charges. | Under the agreement a taxable supply of goods linked with exempt supply of credit: disregarded for partial exemption purposes. However, the agreement was based on the partial exemption rules in force prior to 1 April 1987. Currently, interest received will be excluded from outputs-based partial exemption calculations if the supply is incidental to the trader’s business. This is likely to be the case in most of the instances outlined in this agreement. However, the supply of HP credit as a principal is unlikely to be incidental under current partial exemption rules. If you encounter such a supply, please contact VAT Deductions and Financial Services Team (link is external) , who will advise on the correct position based on the circumstances of each case. |
| R: Supply of equipment on HP | (2) Oil company bears part of cost of installation. | Outside the scope |
The wording of the agreement follows. (The Capital Allowances Act 1968 has been replaced by the Capital Allowances Act 2001.)
Consideration has been given to the liability for VAT on capital contributions made, typically, to secure relief from Corporation Tax under Section 85, Capital Allowances Act 1968. It is not possible to cover every situation and, where doubt exists, arrangements should be cleared with HM Customs and Excise prior to completion of contract documentation.
The following situations have been identified:
Where -
- a capital contribution is paid as consideration for the payer acquiring some rights, reserved processing capacity or an option to obtain future sales, then a taxable supply has been made. There has to be a clear contractual nexus (connection) between the payment and the reciprocating action by the recipient.
- capital contributions are not paid as consideration for goods or services, payments are outside the scope of VAT. This would apply for instance where the capital contributions are not clearly linked under the arrangements to some quid pro quo action by the recipient.
- the obligations of the payer of capital contributions are contained in an agreement which has no specific reference to such contributions impinging upon the obligations of the recipient then the payment will not be held to be a taxable supply merely because the payer is making a lump sum payment or a series of such payments.