Purpose

This brief explains HMRC’s policy on the VAT accounting treatment of promotions where payments are said to be made by motor dealers to finance companies on behalf of the end customer. These are often but not exclusively referred to as dealer deposit contributions (DDC) in the motor retail trade.

Readership

You should read this brief if you’re a:

• retailer of new and used motor vehicles
• company financing the sale to the final customer
• VAT registered business that has purchased a vehicle with a DDC

Background

HMRC is aware that motor dealers who operate DDC type promotions have adopted different VAT accounting treatments. This brief sets out HMRC’s policy, which should be applied consistently across the industry going forward and explains how dealers, finance companies and VAT registered customers should make error corrections for past periods.

Manufacturer deposit contributions

This brief is not concerned with manufacturer deposit contributions (MDC), which are promotions where the manufacturer or importer of the vehicle make a contribution to reduce the amount that the customer has to pay for the vehicle. The manufacturer or importer can continue to make adjustments to the VAT they have accounted for as explained in VAT information sheet 03/14: treatment of refunds made by manufacturers on the National Archives website.

Dealer deposit contributions

Normally, when a vehicle is sold on finance the purchase price is agreed between the customer and the dealer and the dealer completes all the documentation on behalf of the finance company.

There is a sale by the dealer to the finance company and an immediate onward sale by the finance company to the customer.

The customer knows and agrees the final selling price (consideration), including the amount of any deposit and the finance terms, when the agreement with the dealer is made and the documentation is completed.

In marketing material DDCs are described as a financial contribution by the dealer towards the deposit required from the customer by the finance company.

For example a finance company may require a deposit from the customer of £8,000 on a £28,000 car. Under a DDC promotion the dealer is said to contribute (say) £2,000 towards the deposit. The effect being that the customer only has to pay £26,000 for the vehicle (plus finance charges).

Some dealers and finance companies account for VAT based on the headline price (£28,000) with the DDC then deducted from the payment due. By deducting the DDC after the VAT has been calculated and by bearing the burden of the DDC (£2,000) dealers are over paying VAT as they account for more VAT than the customer pays.

Some dealers have tried to correct this by making an adjustment to their VAT account based on VAT Regulation 38ZA.

HMRC views DDCs as a discount on the headline price charged by the dealer. The DDC is shown on the finance and sales documentation and is agreed by all the parties to the transactions before these take place. There is no retrospective adjustment to the amount the customer will pay, nor the amount the finance company will pay the dealer.

VAT is therefore due on the discounted amount actually charged to the finance company and the customer.

For example, the headline price of a car is stated as £28,000, this is shown as being funded by £20,000 finance, a deposit (including part exchange) of £6,000 from the customer and a DDC of £2,000. HMRC views the selling price from which VAT is due as £26,000 (£28,000 headline price less the £2,000 discount/contribution from the dealer).

Error correction

Any VAT that has been miscalculated must be corrected.

Corrections must be made by either:

• making a section 80 claim for overpaid output tax
• adjusting VAT returns following the normal error correction process explained in VAT Notice 700/45

Some dealers may have already submitted or processed adjustments applying Regulation 38ZA. HMRC’s view is that there is no basis in law for Regulation 38ZA to be used for this correction.

Regulation 38ZA applies to retrospective discounts made by the manufacturer or ‘first supplier’ in the UK (a UK VAT registered business that starts the supply chain in the UK, such as an importer). It does not apply to discounts agreed at the point of sale by the dealer.

This means that DDCs are not covered by Regulation 38ZA.

Error correction notices already submitted for a Regulation 38ZA adjustment, will, provided you have submitted appropriate information, be treated by HMRC as section 80 claims.

Dealers who have adjusted their VAT account should review the adjustment to make sure it conforms with the error correction procedure explained in VAT Notice 700/45. If there is any doubt write to HMRC for further advice.

Finance houses do not have to make any corrective action. They can make a section 80 claim for overpaid output tax but must offset the input tax they claimed on the invoices from the dealer. There is therefore nil net tax to adjust.

VAT registered businesses that have purchased a vehicle with a DDC and recovered all the VAT on the price shown on the finance agreement are also affected. They cannot claim the VAT on the DDC element as input tax as it is not VAT, and has been included in the VAT shown on the finance agreement in error. They should follow the error correction procedure explained in VAT Notice 700/45.