New VAT system expected to help out troubled used car dealerships, writes SHANE O'DONOGHUE
WHEN THE Department of Finance quietly announced on its website last week that a deal had been agreed with the motor industry over changes to the payment of VAT on used-car sales, it was cautiously welcomed by the industry that had lobbied for such a change.
It might seem like a simple technicality, but for many dealers, it provides the working capital lifeline to keep them afloat. It also creates a situation where dealers will be eager to clear their forecourts of used cars prior to the changeover on January 1st.
Not only will the new system greatly simplify VAT payments for car dealers, but it will also consign the current “VAT clawback” situation to history.
Since 1994, car dealers have availed of a special scheme for the treatment of VAT on secondhand cars. Following the purchase of a used car – or receipt of a used car as a trade-in – the dealer could claim back the theoretical VAT paid out on the vehicle. This was to allow for the fact that dealers would have to charge VAT on the resale and so that amount was “trapped” in the car until sold.
On selling the car, the dealer paid VAT to Revenue based on the price of the car sold, but if that price was lower than the initial purchase cost, the dealer was still responsible for repaying the VAT he originally reclaimed.
As an example, consider a car bought for €20,000. That was treated as a VAT-inclusive price, so with VAT at 21.5 per cent, the dealer would have claimed back €3,539. If the car is sold for the original price, the VAT is repaid in full, but if the car sold for just €15,000, the VAT portion would amount to only €2,654. A “VAT clawback” of the difference was then required.
In 2008 – following changes to VRT legislation – much of the used stock on dealer forecourts was devalued, placing car dealers in a difficult situation in terms of cash flow, as many cars were being sold at a loss.
Earlier this year, Revenue made concessions to the industry to allow the repayment of owed VAT over four instalments up to January 19th, 2010. Additionally, a VAT margin scheme was agreed upon, whereby dealers account for VAT solely on their profit margin on each car. The VAT margin scheme was included in the last budget – with €20 million allocated to it – but was deferred due to fears within the industry about the loss of working capital that a move away from the current scheme would bring.
Now due to be reintroduced in the Budget and Finance Bill 2010, the VAT margin scheme will take effect from January 1st, 2010. The announcement was timed to pre-empt dealers’ September 19th VAT return, as there will be a transition period from the old system to the new, designed to ease the financial burden of car dealers.
Cars bought before the last day of 2009 (but only those sold after July 1st, 2009) will only be subject to VAT payment on the price the car sells at – there will be no further VAT clawback.
In the example given above, where the dealer buys a car for €20,000 and then sells it at €15,000, he will only be accountable for the VAT received on the sold car: €2,654. As he would have originally claimed €3,539 from Revenue on the purchase of the car, the State loses out to the tune of €885.
While the sample figures may have been representative in 2008, used-car prices have rallied over the past few months, so the cost to the Government may not be significant. Pat Murphy of the Department of Finance states that “our understanding is that the problem has decreased”. Without the added financial pressure of the VAT clawback, dealers can focus on clearing old stock at realistic prices in preparation for the implementation of the new scheme in 2010.