NEW VAT TREATMENT OF VEHICLES VRT/VAT

New VAT treatment of vehicles registered by distributors or dealers prior to sale

With effect from 1 May 2003, there are new rules about the VAT treatment of vehicles registered by motor distributors or motor dealers (referred to further as ‘dealers’) in their own name. As a consequence of these new rules, the Vehicle Registration Tax (VRT) refund scheme for demonstration vehicles has been abolished. The legal basis for the new VAT rules is provided by Section 120 Finance Act 2003.

Vehicles to which the new rules apply

The vehicles affected by the new rules are those which are classified for VRT purposes as category A vehicles (cars in general), together with motor cycles. The purchase of these vehicles, otherwise than as stock-in-trade (i.e. purchases of vehicles for resale), is non-recoverable for VAT purposes.

Vehicle registered on or after 1 May 2003

With effect from 1 May 2003, where a dealer registers a car or a motor cycle in the dealer’s own name, the vehicle is treated as having been removed from stock-in-trade. This removal results in a ‘self-supply’ for VAT purposes. This means that a dealer who has recovered VAT on the purchase or importation of the vehicle, must account for VAT on that vehicle in the VAT return for the period in which the vehicle is registered in the dealer’s name, as if the vehicle had been sold at cost price.

Vehicle subsequently sold on

When the dealer subsequently sells that vehicle to a customer, the dealer will be entitled to make a claim on the VAT return to recover an amount of ‘residual input credit’, as well as having to account for the VAT due on the sale. Effectively, this means that the vehicle is treated as if it were bought by the dealer from a third party, for sale as a second hand vehicle. The basis for calculating the residual input credit is the cost price (inclusive of VAT and VRT).

As the residual input credit is only available at the time of the sale of the vehicle to a customer, both the claim for the residual input credit and the output liability due on the sale of the vehicle must be accounted for in the same VAT return. The effect of this mechanism is that the residual input credit will be offset against the output liability. The dealer’s net liability on this transaction will be the difference between the cost price (inclusive of VAT and VRT) and the sale price. However, the residual input credit cannot exceed the amount of VAT due on the sale. If the cost price (inclusive of VAT and VRT) is greater than the sale price, the residual input credit is limited to an amount equal to the VAT charged on the sale price i.e. the dealer’s net liability on this transaction would be nil.

Further information on the new rules is available in an information leaflet titled ‘New VAT treatment of vehicles registered by distributors or dealers prior to sale’ which is available on the Revenue website at www.revenue.ie