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HMRC internal manual

Business Income Manual

Particular trades: motor dealers

Trade publication figures - value of used vehicle stocks

Motor dealers will only pay approximately trade value, arrived at from trade publications such as Glass’s Guide, for a used car except where they acquire a used car in part exchange for a new car. In that situation the dealer may pay more than it would otherwise have been willing to pay for the used car in order to secure the sale of the new car. The documentation generally shows the inflated price of the used car as its cost to the motor dealer, but in substance the excess of that cost over the trade value is a discount on the sale price of the new car. It is a fairly widespread industry practice for dealers to arrive at the stock value of used cars acquired in part exchange transactions from the published `bottom book’ trade value.

Form versus substance

Under generally accepted accounting practice, the motor dealer’s accounts will show the substance of the transaction rather than its legal form. If the substance is that the excess over the appropriate price derived from the trade publication is a discount on the sale price of the new car, generally accepted accounting practice allows the consistent use of the appropriate trade price of a used car taken in such a part exchange transaction as its cost of acquisition for stock valuation purposes.

The legal form of the agreement does not override generally accepted accounting practice for the purpose of calculating the taxable trade profits. The appropriate trade value at the time of acquisition may be used to arrive at the cost of used cars acquired in part exchange transactions for stock valuation purposes.

Approach in practice

Many dealers arrive at the stock value of a used car acquired in a part exchange transaction from its published trade value at the balance sheet date (`TVBS’) rather than from its published trade value when it was acquired (‘TVA’).

An ordinary motor vehicle depreciates with age. Thus, if the stock is valued on a TVBS basis, it will involve a write down below its cost in substance. That may be justifiable for some vehicles on the basis that the figure is a reasonable approximation to their net realisable value taking into account the market in which they are likely to be sold and the further costs to be incurred. In some cases, however, where the vehicle is to be sold retail, it may not give a reasonable measure of net realisable value.

Notwithstanding the above the consistent use of the TVBS basis is acceptable where the loss of tax or timing advantage arising from the difference between the stock valuation on a TVBS basis and a TVA basis with an accurate net realisable value write down is insignificant.

Trade publications provide different guide prices depending on the model, age and condition of the vehicle. But if the vehicle is in a particularly good condition or has some attractive extras a dealer will pay more than the amount that the published guide would suggest. On the other hand if a vehicle is in particularly poor condition then a dealer will pay less than the guide price. These practices tend to cancel one another out. A further discount to the trade publication value would only be appropriate in the exceptional situation where the dealer could clearly demonstrate that it always bought cars that were in a worse condition than the average used cars acquired in part exchange transactions.

There may be cases where used cars which were not acquired in a part exchange transaction are automatically valued on a TVBS basis in the accounts. The use of a TVBS basis is unacceptable in that situation unless it provides an accurate appraisal of the net realisable value of the vehicles concerned, which is unlikely if the dealer is trading profitably in those vehicles. In such cases the use of that basis is likely to lead to a significant loss of tax or timing differential and so a challenge may be appropriate.