The Government is taking steps to stop motor traders reducing VAT payable on employees' use of demonstrators for nominal fees sometimes as low as £1 a year.

HM Customs & Excise notes that special VAT rules apply to the stock-in-trade cars of the motor trade. However, a legal loophole means that motor traders can avoid the VAT charges on company cars that other businesses have to pay. Such cars are typically cars held by the business and used as demonstrators that employees can outside business hours.

Where no charge is made to the employee, the VAT due on cars provided for personal use is calculated on the basis of the full cost to the business of providing the car. By making a nominal charge of as little as £1 per year to their employees for the use of a company car, dealers only have to pay VAT on the £1.

The Government intends to change the law via a derogation from EU VAT regulations so that in appropriate circumstances Customs will be able to direct that VAT is accounted for on the 'open market value' of the use of the company car by the employee.