Vat on new car

[Geoff 46]

Hi, new member here

I purchased a new car privately from a franchised dealer, and when I sell that car back to them for the full ‘original’ cost, can he reclaim the vat back given that I as a private individual can’t?

On some car adverts, it states “vat available” on some high-end used cars, and “vat not applicable” on others (company purchasers)

Thanks

[Trevor S]

Hi.  I don’t understand “I purchased a new car privately from a franchised dealer, and when I sell that car back to them for the full ‘original’ cost.. “. It seems odd to be selling a new car straight back to a dealer who had just sold it to you – so is there any more to the transaction than this? Was the sale back to the dealer anticipated at the time of the sale to you – was it even part of the same contract? Where does ownership of the car legally lie at each stage – was it ever actually yours? Could the transaction be seen as a “business activity” of yours – i.e might it count towards you needing to VAT register? I’m only asking all this because if there is more to the arrangement than it first appears, that could impact on the VAT treatment. And in any event, HMRC may well query transactions where they can’t immediately see the commercial purpose.

Considering a more typical scenario – dealer A sells car to an individual B. Some time (potentially years) later B sells the car second-hand to a dealer C, who then sells it on to another individual D. Assuming that A and C are VAT registered, the VAT treatment would be:

• VAT would be declared on the original sale to B.
• There would be no VAT on the sale by B to C, as B is not a VAT registered business.
• VAT would be due on the sale by C to D. However C may use a “margin scheme” which would allow them to only account for VAT on the difference between the sale and purchase values (more on margin schemes in HMRC’s notice – formerly 718, now 718/1).

One point about the margin scheme is that the supplier (C in the example above) cannot show the VAT separately on the invoice that they issue to their customer. So if the customer is a business, they would be unable to reclaim any VAT, as they wouldn’t have a valid VAT invoice. The margin scheme is optional, and there are some circumstances where dealers aren’t entitled to use it anyway. So I suspect that the phrases you’re referring to in your last paragraph are to indicate to business customers whether the dealer will be able to issue an invoice showing VAT, as this could impact on the actual cost to them.

Finally, it’s worth noting that the ability for businesses to recover VAT on cars can be quite restricted anyway, see HMRC notice 700/64.

[Geoff 46]

Thanks for the reply, and apologies for my feeble attempted first post.

Car privately purchased from dealer, so I could not reclaim vat back

Sell car back to dealer 18 months later for the market value, which is invoice cost (very rare car)

When dealer purchases car can he claim the vat back because I couldn’t being a private individual.?

Thanks

[Trevor S]

Hi, thanks for clarifying. By the fact that they’ve paid you the original price, I’m assuming that (perhaps due to the rarity) the car hasn’t lost any value in the 18 months since you bought it.  If anything may actually now be worth more, assuming that they’ll be looking to make a profit when they re-sell.

The VAT charged by any company supplying goods or services can only be recovered by a VAT registered business receiving that supply. Each transaction must be considered separately. So the dealer can’t reclaim the VAT which they originally charged you, because they’ve now bought the car back from you as a separate transaction.

This does mean that the dealer is currently out of pocket by the VAT amount. However, if they now sell it on “second hand” to someone else, they will probably be able to use the margin scheme. The margin scheme means that they’ll only now need to account for VAT on the difference between what they paid you and what the new buyer pays them. So once they’ve sold it to the new buyer, the amount of VAT accounted for by them in total will be the same as if they’d sold it from new directly to the new buyer.

As an example, using some round figures to simplify the maths:

• Original sale by dealer to you: £60k (£50k + £10k VAT). Dealer pays £10k to HMRC.
• Later sale by you back to dealer: £60k, no VAT.
• Dealer sells using margin scheme to new buyer, say £66k. Dealer must pay to HMRC 20/120ths of the £6k difference, which is £1k.
• Total paid by dealer to HMRC is £11k, which is the same as if they’d originally sold the car directly to the new buyer for £66k (£55k + £11k VAT).

There would only potentially be an issue if the new buyer was a VAT registered business who would have been entitled to reclaim some or all of the VAT on their purchase of a new car.

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