Legal Article - VAT

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

Published: 21 Mar 2011

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