Andrew Needham looks at what trade-in values should be used for VAT purposes when selling second-hand cars.
When a customer part-exchanges his car, he likes to feel that he is getting a good trade-in price for his existing vehicle.
Motor dealers exploit this as part of their sales techniques, but often they either do not understand the VAT consequences, or they try to adjust the values subsequently.
Example: Part-exchange for a new car
-
Price of the new car including VAT - £15,000
-
Trade-in allowance for part-exchange - £5,000
-
Net payment due - £10,000
If the dealer can only sell the part-exchange car for £4,000, there will be a loss of £1,000 under the margin scheme for second-hand cars, which cannot be offset against profits on other vehicles.
Output tax of £2,500 will be due on the £15,000 received for the sale of the new car.
Discounted prices
If the dealer had reduced the price of the new car by a discount of £1,000 and shown the trade-in allowance as only £4,000, output tax on the new car would have been due on £14,000 (i.e. £2,333.33), not on £15,000, and there would still be no output tax due under the margin scheme for second-hand cars, giving a VAT saving of £166.67.
Don’t retrospectively adjust the discount!
Many tribunal cases have concerned attempts by dealers to alter the values in their records after the sale has occurred and the customer is unaware of the change.
It was clear from the ECJ’s decision in HMC&E v Primback (Case C – 34/99). [2001] BVC315 that it saw the key to the answer as being the subjective value advertised and invoiced to the customer. In other words, if you tell the customer that the price is £x, you cannot argue that the VAT owed to HMRC should be based on £y.
This was supported by a number of tribunal decisions, including North Anderson Cars Ltd (EDN/97/93 No 15415). In that case, cars were sold under hire-purchase agreements to finance companies with trade-in values inflated, to create the necessary deposit required by the company. The tribunal regarded these manual invoices as correctly stating the value of the supply, not the sales order forms and internal computer-generated sales invoices, which showed the realistic trade-in values as agreed with the customers.
In another case, the value of the supply of part-exchange cars was again held to be that agreed with the customers and shown in the documents, even in cases not financed under hire-purchase agreements, rather than the lower sum repayable under a 30-day guarantee of satisfaction if the customer returned the car bought, and the trade-in car had already been sold.
In Hartwell plc (LON/00/101 No 17065), the car retailer solved the problem by issuing 'Purchase plus discount notes' to customers on top of the sum given for the trade-in of the vehicle. Those vouchers then formed part of the deposit required under the hire-purchase transaction for the replacement vehicle. This avoided inflating the price of the trade-in vehicle whilst assisting with the deposit required by the finance company. The Court of Appeal confirmed that the vouchers were not issued in return for any consideration and were not part of the consideration for either vehicle. Therefore, VAT was only due on the sum received from the finance company.
