Legal Article - VAT

VAT Guidance for the Motor Retail Industry

VAT legislation affects every business in some shape or form and can be quite complicated. It can be difficult to find your way around the legislation, in order to establish your obligations and responsibilities in relation to VAT.

The penalties for getting it wrong can be extremely severe.

We have provided some basic guidelines in relation to VAT and have extracted the areas which you are most likely to come across on a daily basis in the day to day running of the business and incorporate subjects which frequently cause the most confusion.


The Second Hand Car Margin Scheme

The Second Hand Car Margin Scheme

Applicable for business who sell second hand cars, enabling VAT to be payable via the Margin Scheme.

The following conditions must be met otherwise VAT may be calculated on the actual selling price of the cars:

Important areas of consideration are:

• Retain a Sales Invoice and Purchase Invoice for each vehicle

• Sales invoices must contain details of the vehicle sold

• Sales invoices must be endorsed with the customer’s signature, confirming his purchase of the vehicle at the price stated.

• Purchase invoices must contain details of the vehicle purchased, with the seller’s signature agreeing to the sale of the vehicle at the price stated.

• You must sign a statement on your sales invoices declaring (if appropriate) ‘Input tax deduction has not been and will not be claimed by me in respect of the car sold on this invoice.’

• Maintain a stock book, recording all vehicles bought and sold.
Your Stock Book must include full details of all vehicles sold under the margin scheme, with the sellers’ and purchasers’ names, the purchase price, the selling price, the margin and the VAT amount due.

Invoices and stock books may be obtained from Lawgistics.

Do not reduce the margin by any repairs to the vehicle, or by any other costs.

Do not use the margin scheme for any vehicle on which VAT was recovered on purchase.

Frequently asked questions:

What do I do if I am buying a vehicle from a private person who can’t raise a sales invoice to me?

You must check the goods are eligible for the scheme and make out your own purchase invoice and obtain the seller’s signature, date of transaction and certification that he/she is the seller of the goods at the stated price.

Does this apply to motorbikes?

Yes – the provisions applying to cars equally apply to motorcycles.

Does the margin scheme apply to commercial vehicles?

Used commercial vehicles may be sold under the margin scheme, as long as you are not charged VAT.

Warranties Mibs and your VAT and Insurance Premium Tax Obligations

Warranties (MIB’s) and your VAT and Insurance Premium Tax Obligations

There are three options in providing a warranty or guarantee for customers.

Insurance warranties and in-house warranties are the most common methods used by a variety of vehicle sellers. Within this section two examples are given to provide further information on the two leading warranty options.

Examples show the difference in VAT, IPT and profit and the difference between the figures when the warranty is given away and sold separately.

Invoicing Best Practices for Vehicle Sales and Warranties

In order to avoid paying additional VAT, all insurance warranties (MBI) must be clearly itemised on the Sales Invoice.

Non-Insurance Warranties can be included within the car-selling price, although the Sales Invoice should indicate a warranty has been purchased.

Advertising of warranties

• Do not advertise ‘insurance’ warranties, unless that is what you are selling as you may become liable for IPT and VAT on part of the money received.

• Do not advertise a warranty as free if a charge is made or shown on the invoice. The warranty could be described as ‘included’ in the price.
Free warranties

• If you supply your own Warranty (e.g. Lawgistics Warranty) or a Mechanical Breakdown Insurance Warranty free of charge and within the car-selling price – you pay no VAT or Insurance Premium Tax.

Insurance Warranty (Mechanical Breakdown Insurance)

• The Customer enters into an insurance contract with an insurance company.

• You, as the Motor Dealer are therefore classed as an agent, arranging the contract of insurance

• The premium received for the insurance is exempt from VAT

• VAT is therefore not payable on the commission and enables you to make profit without paying VAT.

The premium is liable to IPT calculated at 17.5% of the selling price of the policy.

Example:

 

Charge is made for MBI

MBI Supplied free of charge

Car Purchase Price

£4000

£4000

Total Selling Price to Customer

£5250

£5250

Selling Price (stock book)

£5250

£5250

Selling Price (on screen)

£5000

£5250

VAT on margin

£148.94

£186.17

MBI Cost

£100

£100

Selling Price

£250

£0.00

IPT on MB

£37.23

£4.00

Total Profit on Deal

£963.83

£959.83

 
 
 
 
 

 
 
 
 
 
 
 
 
 
Stop-Loss Arrangements

• The premium is paid into a fund

• The fund is insured, and administered by a separate company.

• The policy purchased by the customer is VATable at 17.5%

• It does not attract IPT.

Example:
 
 

 

Charge is made for MBI

MBI Supplied free of charge

Car Purchase Price

£4000

£4000

Total Selling Price to Customer

£5250

£5250

Selling Price (stock book)

£5250

£5250

Selling Price (on screen)

£5000

£5250

VAT on margin

£148.94

£186.17

MBI Cost

£100

£100

Selling Price

£250

£0.00

IPT on MB

£37.23

£4.00

Total Profit on Deal

£963.83

£959.83

 
 
 
 
 
 
 
 
 

 
 
 
 
 
In-House Warranty (e.g. Lawgistics Warranty)

• You collect the money from the customer

• You maintain this ‘pot’ of money out of which claims are made.

• VAT is due on the money received for the warranty

• No IPT is due.

Example:
 

 

Charge is made for MBI

MBI Supplied free of charge

Car Purchase Price

£4000

£4000

Total Selling Price to Customer

£5250

£5250

Selling Price (stock book)

£5250

£5250

Selling Price (on screen)

£5000

£5250

VAT on margin

£148.94

£186.17

MBI Cost

£100

£100

Selling Price

£250

£0.00

IPT on MB

£37.23

£4.00

Total Profit on Deal

£963.83

£959.83

VOSA MOT Test Fees

VOSA MOT Test Fees

Approved test centre

MOT test fees are not VATable (‘Outside the Scope’) provided the charge does not exceed the statutory maximum.

Unapproved garage

(i) receipt of discounts by approved test centre

A discount given by a test centre is treated as a normal trade discount for VAT purposes. There is no VAT liability on the discounts received.

(ii) recharge of MOT’s to customers

• With profit
Any amount charged over and above the MOT test fee is VATable at 17.5%

• Without profit
Subject to the disbursement conditions, (contact Lawgistics if you are not sure) if you show the exact amount charged by the test centre separately on the invoice to your customer, it is free of VAT.

Motor Dealers

Please note when selling a used car you cannot itemise Mot test fees on your sales invoices in an attempt to reduce your VAT liability.

Customs have clamped down considerably on this practice and therefore dealers who itemise MOT test fees on their invoices when selling cars are liable to an assessment by Customs & Excise.
N.B This rule is entirely different to the sale of road tax which we cover later.

What is a Write Back?

What is a Write Back?

It is common practice to offer a prospective customer an over-generous price for part exchange vehicles to such an extent that a profit cannot be made on the subsequent sale. No credit for VAT is allowed.

However if you follow the ‘Write Back’ procedure below you may be able to reduce the VAT loss.

Example:
 

Car Purchase Price

£3500

Advertise the Car for Sale

£4500

 
 
A customer brings in a part exchange vehicle worth £500 for which you offer £1000

The original deal is:
 

Car Sold

£4500

Part Exchange

£1000

Payable

£3500

Profit on Sale

£1000

 
By writing back both prices by £500, the amount payable remains the same, but the VAT loss is reduced:
The revised deal is:
 

Original Price

£4500

Special Discount

£500

Car Sold

£4000

Part Exchange

£500

Payable

£3500

Profit on Sale

£500

 
IMPORTANT
1. Do get the customer to agree to the revised prices by signing the Sales Invoice.

2. Do ensure the finance document price and the invoice prices are identical.

(Applicable where the part-ex vehicle constitutes deposit for a finance deal)

3. Don’t amend invoice prices after the sale and don’t enter different figures on your sales invoice to those on your finance documents or you will run the risk of being fined by Customs & Excise.

Vehicle Road Tax Legislation

Vehicle Road Tax Legislation

Road Tax is not VATable.

The rate of VAT and Vehicle Sales

In order to avoid paying unnecessary VAT follow the guidance below, or you may lose around £11 per vehicle for 6 months tax, or £20 for 12 months tax.

• When you sell a vehicle under the margin scheme, you may separately itemise Road Tax on an invoice, as long as you purchased it on behalf of your customer.

• You cannot itemise Road Tax, on your sales invoice if you offer a vehicle for sale with unexpired Road Tax.

•  Equally you cannot itemise Road Tax on your Sales Invoice if you offer it within the price of the vehicle.

When is road tax refundable?

If you take possession of a part exchange vehicle and you surrender the RFL, the money received does not attract VAT.

Do not alter the purchase price of the vehicle to reflect the value of the refund.

Are you entitled to a repayment of VAT?

Prior to 1 March 1993, VAT was due on refunds received from RFL in respect of second hand cars. When the law changed, dealers were allowed to recover VAT paid since 1 April 1973.

If you have not made your reclaim, you are entitled to do so. Lawgistics can help by making the claim on your behalf.

 

Qualifying Cars For Sale

Qualifying Cars For Sale

A qualifying car is a vehicle on which VAT is charged. You will buy Qualifying Cars from leasing companies, hire fleets and other business users.

You may claim the VAT as input tax BUT you must pay VAT when you sell it.

Do not use the margin scheme for any vehicle on which you have been charged VAT.

Do not sign the invoice to confirm input tax has not been claimed as you would normally do for the margin scheme.

When you sell a Qualifying Car, follow the guidance below:

• Advertise the car at its VAT-inclusive price. If you wish, indicate the car is a qualifying car by means of a car sticker.

• If your customer identifies themselves as a business user, eligible to reclaim any VAT charged, you must issue a VAT invoice showing the full amount of VAT.

• If you sell the vehicle to a person who cannot claim the VAT, such as a private person, your invoice must show a VAT inclusive price.

• The amount of VAT is calculated by multiplying the sale price by the VAT fraction (i.e. 7/47ths)

• If you use a qualifying car for private purposes, then you will have to repay the VAT claimed and the car must then be sold as a margin scheme car.

Commercial Vehicles

Used commercial vehicles may be sold under the margin scheme, as long as you are not charged VAT. If you are charged VAT then you must follow the guidance given above in respect of Qualifying Cars.

 

Second Hand Car Auctions

Second Hand Car Auctions

Margin Scheme Cars – Selling at Auction

1. When you sell a margin scheme vehicle at auction, the selling price is the hammer price less the commission i.e. the net amount received from the auction.

2. VAT cannot be claimed on the commission.

3. The invoice from the auction will be your sales invoice for the purposes of the margin scheme.

Margin Scheme Cars – Buying at Auction

1. When you buy a margin scheme vehicle at auction, the purchase price is the hammer price plus any commission (buyer’s premium).

2. VAT cannot be claimed on the commission.

3. The invoice issued by the auction will be your purchase invoice for the purposes of the margin scheme.

4. Where other charges are made, (e.g. transport, insurance) this will be invoiced separately and VAT can be claimed where appropriate.

VAT Qualifying Cars – Selling at Auction

1. VAT qualifying cars means you are liable to VAT at 17.5% when they are sold.

2. You must tell the auctioneer that the car is being sold with 17.5% VAT.

3. In this situation, the hammer price will include VAT.

4. You may be charged a selling commission (or similar), on which VAT is charged and is recoverable

VAT Qualifying Cars – Buying at Auction

1. When VAT qualifying cars are sold at auction the hammer price includes VAT.

2. You should be told this either by windscreen stickers or by a verbal announcement.

3. Your invoice should show VAT as a separate amount.

4. Where there is a buyer’s premium or other charges, these should be shown separately. The VAT charged is recoverable subject to the normal rules.

Demonstration Cars / Stock in Trade Cars

Demonstration Cars / Stock in Trade Cars

These rules take effect from 1 December 1999.

VAT can be recovered on stock in trade cars provided the following conditions are met:

1. The car can be temporarily made available for private use by employees;

2. You intend to sell the car within 12 months of purchase.

Please note additional VAT is due on the cost of making the car available for employees including depreciation, maintenance etc. even if a scale charge is paid.

When you sell the car, VAT is due on the full selling price.

Remember, VAT is not recoverable if the above two rules cannot be met.

If a car cannot be treated as ‘stock in trade’ because it does not fulfil the rules above, then when you sell the car, the sale is exempt from VAT. This may cause other problems in relation to the recovery of VAT on your purchases, depending on the amount of VAT exempt cars you sell.

If you have any concerns please Contact Lawgistics and we may be able to provide a health check to ensure the recovery of VAT on your VAT Return is correct.

Car Imports

Car Imports

The VAT treatment depends on whether the car is imported from one of the European Union Member State (an acquisition) or from another country as follows:

a) Acquisition from EU Member State

If you give the EU seller your UK VAT number, the car can be sold free of VAT. You must account for acquisition tax.

This means you pay over to Customs the VAT you would have been charged, although at 17.5% and then claim it back as input tax on your Return. The VAT charged is entered in Box 2 on your VAT return.

When you sell the car it is treated just the same as a qualifying car.

b) Purchase from outside the EU

When you import a car from elsewhere, VAT and duty is chargeable. This VAT can be recovered on your VAT return. The car cannot be sold under the margin scheme. You must treat the car as a qualifying car.

c) Problem areas

If you are charged VAT in another EU Member state, then you cannot claim it back on your VAT return. Contact Lawgistics if you are charged VAT in another Member State.

Second Hand Margin Scheme Supply

An EU motor dealer can sell to a UK dealer using the margin scheme. His sales invoices should make reference to this. The UK dealer can then use the ordinary margin scheme to sell the car.

 

Published: 21 Mar 2011

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