Motor Vehicles

Seventh VAT Directive and the Special Scheme for Motor Vehicles

Introduction

The aim of this article is to remind practitioners of the Special Scheme for Motor Vehicles which applies under the Seventh VAT Directive and which was transposed into Irish Law in the 1995 Finance Act.

The Value Added Tax Special Scheme for Means of Transport (Documentation) Regulations 1996 (referred to below as the Regulations) which govern the practical application of the scheme were introduced with effect from 1 July 1996.

There is detailed explanatory leaflet (VAT Treatment of Second-Hand Vehicles - October 1995) available on the scheme.

Audits on motor dealers who supply qualifying vehicles under the scheme have indicated problems particularly in the quality of documentation available to support a deduction of residual VAT and the invoicing procedures for vehicles sold under the scheme.

Documentation supporting claims for residual input credit

Dealers who claim residual input credit on qualifying motor vehicles must be in possession of proper documentation to support the claim.

Where the vehicle is acquired from another dealer the invoice must in accordance with Paragraph 7 of the Regulations show the following endorsement:

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

Where the vehicle is acquired from other sources e.g. private individuals within the State, a settlement voucher prepared in accordance with Paragraph 4 of the Regulations must be issued to the person from whom the vehicle is acquired. A copy of this settlement voucher must be available for inspection.

Where residual VAT is claimed on vehicles coming from other Member States of the EU invoices for such vehicles must not show VAT separately and must be endorsed by the supplier to the effect that the vehicle has been sold under the margin scheme /second-hand goods scheme in that Member State. Where the vehicle is zero- rated under the intra-community supply rules it means that the dealer in the other Member State is not supplying the vehicle under the special scheme and the vehicle is therefore not a qualifying vehicle. Because of this the Irish dealer will not be entitled to claim any residual input credit on the vehicle.

Invoicing of vehicles supplied under the scheme

When a dealer supplies a vehicle under the scheme he/she may not issue a VAT invoice to the purchaser but must issue an invoice which does not show VAT separately and must include the endorsement referred to above.

Motor dealers who purchase vehicles under the scheme will be able to claim residual input credit on the vehicles but other VAT registered persons such as driving schools or vehicle leasing companies (who normally could claim a deduction in respect of a passenger motor vehicle) who purchase the vehicles for use in their business will not be able to claim any type of input credit. It is very important therefore that the correct type of invoice is issued to the purchaser at the time of the supply of the vehicle.

Where vehicles are supplied to customers outside the State, a liability to account for VAT on the supply arises except where the vehicle is supplied as an intra-community supply or export in which case zero-rating can apply. However, in such cases the purchaser will forfeit his entitlement to claim residual input credit.

Revenue Audits

In the course of carrying out audits on the motor trade, auditors will pay particular attention to documentation produced to support claims for residual input credit and the requirement to account for VAT on all supplies of vehicles. If required, assessments may be raised to recover VAT input credit incorrectly claimed as a result of inadequate documentation

Changes in the 1999 Finance Act

Since the introduction of the scheme, Farm Machinery Dealers were concessionally allowed to claim residual input credit on farm machinery acquired from flat rate farmers who used such machinery in the course of a farming activity. The entitlement to claim residual input credit in such cases has been confirmed by Sections 114 (b) and 117 of the Finance Act 1999.

Copies of the explanatory leaflet mentioned above are available from local tax offices or from the Revenue Forms & Leaflets Service at 01- 878 0100.