The challenges of VAT in motor retail

The challenges of VAT in motor retail

Wednesday, 31 July 2019

Motor retail is one of the more challenging sectors to operate in from a VAT perspective.

Over the past couple of years, HMRC have spoken on issues such as dealer deposit contributions and when to zero rate adapted vehicles (as well as what evidence it would expect to support zero rating).  There’s also Making Tax Digital (MTD) to consider (we have a simple, cost effective solution for any businesses struggling with MTD).

I’ve highlighted a few of the issues we’ve come across when working with businesses in the motor retail sector:

Dealer deposit contributions. Opportunities still exist if you’re making such contributions and haven’t reviewed the VAT treatment of them after last year’s announcement.

Partial exemption. This is where VAT on costs is attributed to taxable and exempt supplies, thereby identifying what can be recovered and what cannot. It’s an issue which businesses should be monitoring. Motor retailers should be monitoring the levels of finance and warranty commissions and VAT exempt lettings. These need to stay below 1% of total business turnover.  Where the income exceeds 1%, the business may be required to restrict VAT recovery on overhead costs (as well as being required to restrict VAT recovery on any direct costs).

Rolled up negative equity. Issues where customers have purchased a new vehicle and rolled up negative equity as part of the finance package.  HMRC may take the view that the selling price of the vehicle (with the sale actually being made to the finance house rather than the customer) is the full value of the finance provided, not just the vehicle selling price.  If so, the additional negative equity on the exchanged vehicle becomes VATable as part of the sales proceeds.  This means that a small number of transactions can still result in an unwanted VAT liability.

Stock in trade cars. Make sure that the car fuel scale charge and the VAT due on the private use of stock in trade cars provided to directors and employees free of charge are processed through the VAT return. Many traders aren’t calculating VAT due under the second-hand margin scheme correctly.  This often results in too much VAT being declared to HMRC on sales.  Experience shows that this is an issue particularly where vehicles are bought at auction.

Finally, a couple of issues which may be outside the business’s control, but which have implications for the VAT position. 

  • The tax point of consignment stock vehicles (ie when you can recover the VAT) remains an issue. 
  • HMRC’s guidance on when it considers a personal contract purchase (PCP) vehicle to be a lease or hire purchase may result in a large number of PCP vehicles reaching dealerships which remain qualifying vehicles and do not fall within the second hand margin scheme in the future.

Our VAT team has worked with a wide range of motor retailers and would be pleased to talk to you about any issues or concerns you may have.

For more information on how we can help, please speak to your usual Larking Gowen contact.

Call 0330 024 0888 or email


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