VAT Treatment of Second-hand Vehicles

Introduction

A number of changes in the VAT treatment of second-hand vehicles were introduced with effect from 1 July 1995. These changes arose out of the implementation of the EU Seventh VAT Directive (94/5/EEC) in the Finance Act 1995. This article sets out the main features of the new scheme.

Trade-In

The old VAT rules covering trade-ins have been abolished with effect from 1 July 1995. Prior to that date, when a vehicle was traded-in against the purchase of a new vehicle, VAT was chargeable on the amount of the cash settlement only. The subsequent sale of the traded-in vehicle was taxable on the consideration payable on that sale.

From 1 July 1995, if a dealer accepts a vehicle as a trade-in against the purchase of a new vehicle, both the sale of the new vehicle and the acceptance of the trade-in are treated as two separate transactions for the purposes of accounting for VAT:

• in respect of the sale of the new vehicle the dealer must account for VAT on the full consideration he/she is entitled to receive on that sale, i.e. the total of the cash settlement plus the value of the trade-in and this total should equal the amount that would be received if the new car was sold for cash.
• the trade-in is treated as the purchase of a second-hand vehicle, and a VAT deduction can be claimed by the dealer. If the dealer receives a VAT invoice from the person supplying the trade-in, the deduction is claimed in the normal way. Otherwise, if it is a qualifying vehicle, the dealer claims a deduction of the residual VAT included in the purchase price.

Qualifying Vehicle

A qualifying vehicle is a vehicle bought by a dealer as stock-in-trade for resale from one of the following:

• a private individual in Ireland or in another Member State of E.U.
• a business in Ireland or in another Member State of the E.U. which could not claim a VAT credit on its purchase of the vehicle or which is not obliged to issue a VAT invoice in respect of the sale of the vehicle
• another motor dealer in Ireland who claimed residual VAT on his purchase of the vehicle
• a motor dealer in another Member State selling the vehicle under the special scheme for the taxation of second-hand goods in that other Member State.

The vehicles on which a dealer can claim residual VAT are therefore, those which are sold or traded-in to the dealer by a person who was not entitled to deduct any VAT in relation to the original purchase of that vehicle.

A dealer may also claim a deduction of residual VAT on a vehicle which is sold or traded-in by another dealer who took a deduction of residual VAT on the original purchase of that vehicle.

Residual VAT

Residual VAT is deductible in the VAT period in which the vehicle is purchased. To claim the residual VAT the motor dealer should add the amount of the residual VAT to the amount of VAT charged on any other deductible purchases and enter that total on the VAT 3 return for that period.

The amount of the residual VAT is calculated at the rate of VAT chargeable on the supply of motor vehicles in the Member State where the person selling the vehicle to the dealer is based. The purchase price is always treated as VAT inclusive.

Where a motor dealer claims residual VAT on the purchase of a qualifying vehicle, he/she must be able to support that claim by an invoice or settlement voucher, completed in accordance with the appropriate Regulations.

Example

If the qualifying vehicle is bought from an individual or business in Ireland, where the current rate of VAT is 21%, the residual VAT is calculated as follows:

Assume purchase price	£10,000
Residual VAT:
£10,000 x 12/121	£ 1,736

Clawback

The amount of residual VAT deducted by the dealer in respect of the purchase of a qualifying vehicle must not be more than the amount of VAT charged by the dealer on the subsequent sale of that vehicle.

If a qualifying vehicle is sold for less than it was bought for, an adjustment must be made in the VAT return covering the period of the sale, to reduce the amount originally claimed.

Example

Qualifying vehicle purchased for	£10,000
Residual VAT claimed in VAT 3 for period of purchase	£ 1,736
[Sold for £9,000 including VAT]
VAT on sale accounted for in VAT 3 for period of sale	£ 1,562
(£9,000 × 21/121)
Amount of clawback which must be deducted from VAT on purchases in VAT 3 for period of sale	£ 174

The clawback will not apply to vehicles taken into stock prior to 1 November 1995.

Invoicing -Changes from 1 July 1996

Where a dealer sells a vehicle on which he has claimed residual VAT, he/she may not issue a VAT invoice for the customer to claim input credit. Therefore, where a qualifying vehicle is sold to another taxable person, the invoice issued must not show VAT separately and must include the following endorsement:

“Special Scheme - this invoice does not give the right to an input credit of VAT”.

Because of the impact of this rule on the car leasing sector, its introduction was postponed until 1 July 1996. From that date, it will not be acceptable for a motor dealer to issue a normal VAT invoice in respect of the sale of a vehicle on which he/she has claimed deduction of residual VAT.

Supply of vehicles outside the State

Special rules apply in relation to vehicles sold to customers outside the State and further information is available on this if required.

Further Information

An information leaflet “VAT Treatment of Second-hand Vehicles” setting out details of the scheme is available from the tax office.