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HMRC internal manual

VAT Margin Schemes

Second-hand vehicles: Mechanical breakdown insurance and warranties

Notice 718/1 describes situations which can commonly arise when dealers sell cars with mechanical breakdown insurance (MBI) and warranties. They are also covered in detail in VATVAL12200

The Supply policy team has policy responsibility for valuation matters  

Tribunal cases relating to warranties

There are two useful tribunal cases relating to warranties sold with used cars - HB & DD Geddes (LON/88/681) and Centurions (LON/91/2158).

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Insurance Premium Tax and vehicle insurance premiums

The selective rate of IPT, which is set at 17.5%, applies to premiums receivable by insurers for insurance relating to a motor vehicle when it is sold through a supplier of motor vehicles.

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Conditions for selling vehicles with MBI and warranties

Dealers who sell cars with MBI and warranties must, at the time of sale, fully disclose the value of all insurance-related charges, and evidence such disclosure on the sales invoice. If this requirement is not fulfilled, then any fee or commission income received becomes standard-rated for VAT purposes. Any such standard-rated insurance-related income must be deducted from the vehicle’s selling price and dealt with outside the margin scheme. Tax becomes due on the full amount of such standard-rated charges, as well as tax on the gross profit margin, if any, on the vehicle itself.

In circumstances where there is no contract of insurance underwritten by an insurer, such as guarantees or “in-house” warranties, VAT is due at the standard-rate. The guarantee may be part of an overall package of benefits supplied with the car. This is likely if the car is supplied under one of the manufacturer-backed schemes. In such cases, there is a multiple supply for a single price and the selling price will have to be apportioned between the car and guarantee.

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In circumstances where vehicles are sold at little profit or at a loss, there remains the possibility of value-shifting - that is, suppressing the value of the standard-rated guarantee and inflating the value of the vehicle.

If you identify any such manipulation or any other instances of problems concerning the sale of MBI and warranties with second-hand vehicles, please report the facts through your TAVO to the Anti-Avoidance Group policy team. Should you require further guidance on insurance please contact the VAT Deductions and Financial Services team.