HMRC have this week published their view of the correct VAT treatment for dealer deposit contributions.
These are contributions made by car dealers towards the cost of new and used vehicles where the customers use a finance company.
For example, if I wanted to purchase a new car for £28,000 from a dealer, they may request a deposit of £8,000. However, as an incentive, the dealer may offer to contribute £2,000 towards the deposit, leaving their customer to pay £6,000 as a deposit and the remaining £20,000 plus finance costs over the term of the agreement.
The VAT treatment of these contributions has been unclear in the past with some dealers accounting for VAT on the full selling prices (£28,000 in the above example) or only on the selling price after deduction of the contribution (£26,000 in the above example).
Following the publication of their Brief, HMRC have confirmed that the dealer deposit contributions should be treated as a discount on the selling price. Therefore, VAT is only due on the price after deduction of the contribution (£26,000 in the above example).
This will not affect dealers who already account for VAT in accordance with the published view. However, dealers that have been accounting for VAT on the full selling price, including the contribution, are being encouraged by HMRC to treat the overpayment as an error and to submit declarations using Form VAT652 for up to four years.
Whilst the Brief does not mention it, I would expect HMRC will almost certainly only consider repaying the overpaid VAT where the dealer can demonstrate that they will not be unjustly enriched but pass the VAT on to their customer.
For clients who have purchased vehicles and have been invoiced for VAT on the full selling price of the vehicle, if they were entitled to recover the input VAT charged, they would need to pay back the VAT incorrectly charged on the contribution, although they should be able to recover this from the finance company depending on the terms of the contract.
If you have any clients, dealers, finance companies or customers who may be affected by the above, please contact a member of the VAT department who would be able to assist with any correction or provide a quote for a VAT review if required.