VAT - Motor Mania

BARRY BRAIM looks at recent developments which will impact upon the VAT treatment of supplies involving motor vehicles and motoring expenses.

MOTOR VEHICLE DEALERS and businesses generally will be affected by a number of recent developments relating to the treatment of supplies of motor vehicles and motoring expenses.

Margin scheme

Customs have published a revised VAT Notice 718 effective from January 2002. A number of changes are made to the scheme's operation, in so far as it relates to supplies of vehicles, including:

• There is no longer a requirement for purchase or sales invoices to show the signatures of suppliers or purchasers (or the dealers themselves).
• A record must now be kept of goods on sale or return.
• Records must be kept for more than the normal six- year period where they relate to unsold vehicles so as to prove their eligibility for inclusion in the margin scheme.
• If a vehicle is sold on hire purchase, a copy of the hire purchase agreement must be attached to the customer's sales invoices or a cross reference to the agreement included in the sales records.

These changes take effect from January 2002 for businesses using the scheme for the first time. However, for businesses already using it, the changes need not be implemented until 31 July 2002.

Interestingly, the revised notice makes clear for the first time that secondhand commercial vehicles have been eligible for the margin scheme since 1 January 1995. Businesses selling a secondhand commercial vehicle can use the scheme, thereby accounting for VAT only on any profit margin, in the following circumstances:

• purchases from private individuals;
• purchases from unregistered United Kingdom businesses;
• purchases from VAT registered businesses themselves using the margin scheme for their supply;
• purchases from businesses who were unable to reclaim input tax on their purchase of the vehicle.

In my experience, very few vehicle dealers are aware of this and will have been declaring VAT on the full selling price of used commercial vehicles. Where this is the case, claims for overpaid VAT should be submitted, unjust enrichment rules permitting.

Demonstrator cars

Prior to 1 December 1999, motor dealers could not ordinarily recover VAT on the purchase of a demonstrator car due to its availability for private use. As a result, when these cars were sold they were exempt from VAT, being 'input tax blocked goods'.

From 1 December 1999, demonstrators normally fall to be classed as stock in trade cars and VAT recovery on purchases is allowed. However, VAT then has to be accounted for on the full selling price when they are disposed of.

When undertaking partial exemption calculations to determine recoverable input tax, car dealers should exclude the value of their demonstrator car sales from the calculation, on the basis that that they are disposals of capital assets. This point has recently been confirmed by the High Court's decision in the case of JDL Ltd [2002] STC 1, where demonstrators were held to be capital assets due to their substantial durability and value compared to other goods used in the business and because they were depreciated in the management accounts, unlike vehicles bought for resale.

If car dealers have included the value of demonstrator car sales in their partial exemption calculations, their input tax recovery could well be incorrect. Up until 1 December 1999 they may have under recovered VAT (due to the sales being VAT exempt) and from 1 December 1999 they may have over recovered VAT (due to the sales being standard rated). Voluntary disclosures should therefore be made as appropriate.

Self-drive car hire

The requirement to restrict VAT recovery by 50 per cent applies equally to self-drive car hire and to longer term car leasing, where a car is available for private use. However, by concession Customs have allowed full VAT recovery on self-drive car hire where the period of hire is for five days or less provided that there has been some business use of the car.

Customs have published a revised Notice 700/64 dated January 2002 in which this concession has been amended, apparently with no prior warning. Paragraph 4.4 of the new notice states that if a self-drive car:

'is hired simply to replace an off-the-road ordinary company car, the 50 per cent block will apply from the first day of hire. But we accept that in other cases - perhaps you do not have a company car - if you hire a car for not more than ten days to use specifically for your business, the 50 per cent block will not apply.'

While I acknowledge that Customs have every right to amend any concession, the lack of publicity or lead-in time given to this particular change is disappointing, and many businesses will be caught out. It would be helpful if Customs could publicise the change by way of some comment in a 'VAT Notes' sent out with VAT returns, and that the effective date of the change is such as to allow businesses time to prepare for it.

Mileage rates

It is common knowledge that when a business pays an employee a mileage rate for the use of a car for a business journey, that VAT can be recovered by the business on the fuel element of the mileage rate paid.

It is sometimes difficult, however, to secure agreement as to what proportion of the rate paid actually is referable to the fuel element. The position has been clarified thanks to guidance recently provided by the Inland Revenue. This guidance confirms that the following amounts will be accepted (by both the Revenue and Customs) as the fuel element from the start of the 2001-02 tax year.

The guidance also gives an undertaking that these figures will remain unchanged unless fuel prices vary by more than ten per cent.

This welcome initiative provides more certainty and reduces the scope for future disputes.

Barry Braim is an associate with Clive Owen & Co, Darlington.

Issue: 3845 / Categories: