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HMRC internal manual

VAT Valuation Manual

HM Revenue & Customs
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Specific applications: motor dealers and manufacturers: “free” Mechanical Breakdown Insurance (MBI) or warranties

Where MBI is supplied genuinely free of charge it will not be liable to higher rate IPT (the only IPT due would be on the actual premium paid by the dealer to the insurer).

For VAT purposes where a trader purports to provide MBI or a warranty free to the customer, no part of the selling price can be attributed to it. The price of the car shown on the invoice to the customer must be the same as that entered in the dealer’s stock book. If the MBI or warranty is mentioned on the invoice, no separate charge for it must be shown. In cases where a charge for “Free” MBI has been made in the dealers stock book or elsewhere in the business records then the facts should be reported to the Insurance UoE 

You may need to consider whether there is in reality a “free” MBI or warranty as a result of evidence provided by dissatisfied customers who are not always able to appreciate this distinction. It may be helpful to obtain evidence of how the car was advertised and presented to potential customers to help you decide.

For example:

  • “Renault £4,000, including MOT and 6 month’s warranty” - would suggest that the £4,000 sale price includes the charge for the MBI or warranty.
  • “Renault £4,000, plus free MOT and 6 month’s warranty” - would suggest that the MBI or warranty is free.

In the first example, the invoice should reflect the values of the services as they must be excluded from the value of the car for the purposes of the margin scheme.

In the second example, the difference between the buying price of the car and the selling price of £4,000 would all be liable to VAT at the standard-rate.