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HMRC internal manual

VAT Valuation Manual

Specific applications: motor dealers and manufacturers: hire-purchase second-hand car sales

Details on The VAT Margin Scheme on second-hand cars and other vehicles are in Notice 718/1. Under this type of sale, the car dealer is selling the car to the finance company, who then sells it on to the car buyer. Dealers should treat these transactions as cash sales and enter the cash price of the item as shown on the hire-purchase agreement as the selling-price in the stock book. No VAT will be due upon separately itemised finance charges. Dealers can use a copy of the HP agreement as a sales invoice provided it shows:

  • All the identifying details of the item, and
  • The cash price of the item as the gross price payable. The gross price is the amount borrowed plus cash paid, plus any amount allowed for part exchange.

VAT must not be shown separately on the HP agreement or any invoice.

We intermittently receive queries concerning cases where dealers have “inflated” the value of vehicles received in part-exchange in order for the customer to more easily secure credit from the finance company, or where a cash deposit is created or inflated. The finance agreement documents can therefore show values different to those on documents issued to the customer.

Our only interest in such cases is in establishing the value of the consideration actually received for the vehicle. The monetary part of the consideration does not present a difficulty, being any cash actually paid by the customer plus the amount lent by the finance company. The non-monetary part, represented by the car taken in part-exchange, is more difficult to value because different values can be shown in the trader’s documents as described above.

The position can be resolved by posing the valuation question proper to non-monetary consideration - namely: What is the amount of money for which the part-exchange vehicle is substituting? In other words you can establish the value by determining what the customer would have had to pay for the car if payment had been wholly in cash.

Customs won a tribunal, North Anderson Cars Ltd (EDN/97/93) confirming our view of these transactions.

Anderson is a car dealer that sells new and second-hand cars. In many cases, a customer will require finance from an HP company in order to purchase his selected car. Usually the customer hands over his old car in part-exchange. The finance company requires borrowers to put up a certain percentage of the car’s purchase price as a deposit.

In order to enable its customers to meet the finance company’s requirements Anderson engages in the practice of “bumping”. Rather than discount the selling price of the replacement car, it inflates the value of the car taken from the customer in part-exchange and the selling price of the replacement by commensurate amounts.

These “bumped” figures are entered onto the documentation sent to the HP company which, in consequence, grants the credit to the customer. Despite entering inflated amounts on the finance documentation, Anderson only accounted for output VAT on the “pre-bumped” selling price of the replacement car, contending that the lower figures represented the true value of the supply.

Anderson contended that the consideration for the replacement car comprised any cash deposit, the money from the finance company and the part-exchanged car. Customs contended that the inflated value had to be attributed to the part-exchanged car because this was the value that the parties to the sale of the replacement car (the dealer and the finance company) had subjectively attributed to it.

The Tribunal found in Customs’ favour. Its main conclusions were that: it was a characteristic of HP transactions generally, and those in this case specifically, that the supply of the replacement car was to the finance company

The parties to the above transaction were Anderson and the finance company and, although the customer played an important role, it was the value attributed by those two parties that counted for VAT purposes. The subjective value attributed by the parties was that shown in the document sent to the finance company, the higher values reflected the economic reality.

The case of Andrew Hillas Ltd (Man/03/435) covers fictitious deposits on Hire Purchase sales.

The HQ Branch have responsibility for the Second-Hand Scheme generally and problems associated with tax invoices are the responsibility of VATPOT.