Thursday, June 11, 2009

Tax implications of the Vehicle Scrappage Scheme

Tax implications of the Vehicle Scrappage Scheme

The government announced at Budget 2009 the introduction of a temporary vehicle scrappage scheme. It is a voluntary scheme which will be administered by participating motor manufacturers and dealers, along with the Department for Business, Enterprise and Regulatory Reform (BERR). Information about it can be found on the BERR website and at Directgov - Motoring. You may also contact BERR’s enquiry unit on Tel 020 7215 5000, or email the BERR Automotive Unit with 'scrappage' entered in the subject heading.

A. VAT and direct tax profits implications

Vehicles supplied under the scheme will be subject to the normal VAT and direct tax rules. The purpose of this brief is to explain how those rules apply to the £1,000 subsidy payable by BERR on qualifying supplies made under their scheme, plus the £1,000 discount paid by the manufacturer.

Dealers

If you are a dealer participating in the Scheme and the manufacturer uses the arrangements above, the cost of the new vehicle received by you is unaffected, and you should make no adjustments to the VAT you pay to the manufacturer, or claim from HMRC as input tax. As explained above, the manufacturer is not providing a £1,000 (or greater) discount to you as part of the Scheme – they are providing it to your customer. Your selling price for the vehicle has not changed and you must not reduce your output tax. Whatever your final VAT-inclusive ( 'On The Road ') selling price of the new vehicle is, under the Scheme your customer pays £2,000 less, with the balance of the consideration being made up of the two £1,000 subsidies. Under the Scheme, it is important that it is clear to your customer that they are paying £2,000 less than would otherwise be the case – see Directgov - Motoring (opens new window)
The effect of the Scheme on the dealer is neutral for the purposes of computing trading profits. The £2,000 reduction in the sale proceeds received from the customer is matched by the £2,000 trade receipt received in the form of the subsidies paid to the dealer under the scheme.


Customers

Customers buying a new vehicle under the scheme will pay £2,000 less for the vehicle, since BERR will be paying £1,000, and the vehicle manufacturer will be paying £1,000 towards the cost of the purchase. The subsidies will be settled between the manufacturer, dealer and BERR so you will not physically be paid these amounts.
If you are VAT-registered and buy a new car or van under the scheme, you may need to reduce your input tax in respect of the manufacturer’s discount. However, you only need to consider this if you are entitled to claim VAT on the purchase of a vehicle – for example, on certain commercial vehicles, or a car that is intended to be used primarily as a taxi; driving instruction car, or self-drive hire (but see paragraph 3.1 of VAT Notice 700/64 ‘Motoring expenses’). If, under the normal VAT rules, you are entitled to reclaim the VAT you are charged on the purchase of a new vehicle and you buy one under the Scheme, you must reduce the input tax you claim in proportion to the manufacturer’s discount. This is because, at the beginning of the chain of transactions culminating in your purchasing the vehicle, the manufacturer will have reduced its output tax. Therefore, since the manufacturer contributes £1,000 and the standard rate of VAT is 15 per cent, you must reduce your input tax by £130.43. You will not receive an amended invoice or credit note. This is the normal VAT treatment for business customers receiving such manufacturer’s discounts - see Revenue and Customs Brief 08/07

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