There are many areas of motor retail that can be subject to VAT risk and failing to apply the right VAT treatment can lead to assessments for underpaid VAT and the threat of penalties and interest.

But as HMRC’s approach focuses more on taxpayer behaviour, it’s important for motor dealers to implement a clear VAT strategy and robust processes and controls to help manage VAT risk.

For accounting periods starting after 15 September 2016, dealer groups with a turnover in excess of £200m will now be required to publish their tax (including VAT) strategy.

This is expected to set out the group’s approach to managing tax risks; its attitude to tax planning; its appetite for risk; and its approach to dealing with HMRC.

This follows on from the requirement of other large corporates to make a senior accounting officer declaration regarding the completeness of each businesses tax processes and controls. 

For those organisations that fall outside of SAO/tax strategy and do not have access to a client relationship manager at HMRC, it can be difficult to assess what good VAT compliance practice looks like.  

Finance commission adds to the complexity

With an estimated 80% of new private car sales being finance backed in 2016, the increase in exempt commission income for dealerships has meant that VAT recovery on overhead purchases across the industry has become more complicated.

This is further impacted by the constant demand from the manufacturers to update the sales space to reflect the latest brand images.

These refurbishments can prove costly to the dealership when it is expected to fund them itself, and even more costly when it may not be possible to recover all of the VAT incurred.

If these costs straddle different partial exemption periods, then it can quickly become complicated from an administration perspective.

These refurbishments are typically considered overhead costs of the business and input VAT will need to be restricted in line with the partial exemption method.

One-off transactions can have a big impact

With many dealerships looking to expand, it is inevitable that there will be some mergers, acquisitions and disposals.

As these transactions typically involve large numbers, the VAT status can have a significant impact on cashflow. 

VAT risk will also need to be managed where the acquirer takes on the VAT history of the business it is buying. Due diligence and a review of the VAT warranties will be required to manage this effectively.

In addition, input VAT recovery may not be available on all of the costs. Deal fees are a particularly contentious area and one where HMRC has had a string of successes challenging taxpayers in the courts.

The key here is early planning both in terms of the structure of the transaction and the way in which professional advisers are engaged and paid.    

Land and property is another area where specialist input may be required to ensure that proper consideration is given to the liability of the transfer such as whether it’s VATable, exempt or part of a business transfer and the VAT recovery position. 

In addition to VAT, Stamp Duty Land Tax (SDLT) (or Land and Buildings Transaction Tax (LBTT) in Scotland) will also be applicable to land and property transactions and is generally a cost that cannot be recovered by the business. Typically, the SDLT or LBTT value is calculated on the VAT inclusive cost of the purchase price. 

Zero-rating and VAT fraud will now be under HMRC’s spotlight

When supplying a vehicle that would appear to meet the conditions for zero-rating, evidence should be held to support the VAT treatment, i.e. evidence that the vehicle has left the UK (in the case of an export) or evidence of a customer’s disability and the adaptations made. 

Whilst this is an area where mistakes will slip through, this will be an area of even greater focus for HMRC following the announcements in the Autumn Statement.  

HMRC focus remains on rebates, partner packages and incentives

This area continues to be under scrutiny from HMRC, with errors arising both as a result of compliance errors such as how VAT is recorded in the sales templates, to more fundamental issues regarding the way in which some of these incentives are treated – raising the prospect of retrospective claims. 

Dealers who sell insurance with vehicles, or who provide it free of charge, should also be aware of potential insurance premium tax consequences and/or potential cost savings within the supply chain. 

Compound interest: one to watch

As well as VAT being a complex tax for motor retailers, it has also famously led to a battle lasting over 15 years to secure large historic VAT repayments which went in favour of the dealerships.

Dealers that have submitted claims for statutory interest calculated on a compound interest basis will be eagerly awaiting the outcome of the litigation in the forthcoming Littlewoods case.

However, they will have to wait a little longer, as the appeal has been listed to be heard during the summer of 2017.

Implementing the right behaviour

Navigating the complex VAT landscape can be difficult but if motor dealers implement the right strategy and processes then this will help to manage and mitigate the VAT risk and any financial repercussions, such as penalties and/or interest.

Author: Rowena Clifton, indirect tax director at RSM