VAT avoidance: demonstrator cars

Way back in February of this year Customs announced that they had submitted to the European Commission a derogation to be able to change VAT law so that they could direct for VAT to be accounted for on the “open market” value of the use of a company car by an employee.

The problem stemmed from what Customs considered to be a VAT avoidance scheme operated by some car retailers. As readers will know, most businesses cannot recover VAT on new cars, however “stock in trade” cars of motor dealers are not covered by this rule.

Instead dealers must account for VAT on any private use of such cars. If no charge is made to the employee then the dealer must account for VAT on the full costs of making the car available.

In view of a loophole, dealers are able to get around this requirement to account for VAT on the costs of making the car available by simply making a nominal charge to the employee. It has even been known for this nominal charge to be as low as £1 per year. This way the dealer is only required to account for VAT on £1 but is still able to recover the full VAT incurred on the purchase of the car.

The European Commission has now given authorisation that the UK can change VAT law in order to block the loophole in the existing law. Customs will now be able to determine the value of supplies of “stock in trade” cars that are made available by dealers or car manufacturers to their employees or other specified persons (such as a relative) for a consideration at less than open market value. The change in the law shall be effective from 1 January 2005 and from that time Customs will be able to direct that the value of the supply shall be its open market value.

As we are now in December there is not a great deal of time left to advise motor dealer clients of the changes that are to be implemented and the changes that they will have to make to their own internal systems.

Should you want to discuss this matter in any further detail please contact Barry Hincks on 01455 850000.

Barry Hincks bhincks@qdosconsulting.com

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