1. FOCUS ON: VAT IN THE MOTOR INDUSTRY
Recently HMRC has been targeting the motor retail industry in relation to VAT compliance.
Our experience has revealed that as part of routine VAT inspections, there are three key
areas of interest: partial exemption; Capital Goods Scheme; and VAT recovery on deal costs.
Partial exemption
It has been estimated that over 80 per cent of private new
car sales are purchased on finance. In 2016, more finance
backed sales have been arranged than ever before*
. As a
result of this, VAT exempt income is increasing and VAT
recovery on underlying costs may require restriction. Motor
retail businesses should therefore take extra care when
determining their VAT recovery position.
The partial exemption default calculation used to determine
the amount of VAT recovery, is known as the standard
method. When VAT exempt income (eg finance commission)
represents more than one per cent of total turnover, an input
VAT recovery restriction on overheads may be required.
It can be difficult to determine what should be included as an
overhead item for partial exemption purposes and this area
often requires specialist advice.
The standard method normally results in relatively high levels
of restriction and so we often negotiate partial exemption
special methods’ for our clients with HMRC which better
reflects the business activities.
Capital Goods Scheme (CGS)
Motor retailers are often required to refurbish showrooms
to improve customer experience and keep pace with
manufacturer’s expectations. Depending on the values
involved, these regular refurbishments can be CGS items.
Consideration should be given on the amount of VAT incurred
on refurbishments or construction that can be recovered
in relation to the build. VAT recovery on these large projects
is normally calculated in line with the partial exemption
recovery percentage. These rules can be complex if the build
falls into two different partial exemption periods.
CGS items should be reviewed on an annual basis and the
relevant adjustment made where applicable.
VAT recovery on deal costs
As the motor industry continues to grow, acquisitions and
disposals are becoming more common.
VAT recovery on deal costs has been a hot topic with HMRC
over the last few months. Careful consideration should be
given when determining the extent to which VAT can be
recovered in relation to the costs incurred during corporate
transactions to both acquire and dispose of businesses or
parts of a business.
HMRC penalties
The points mentioned above are common areas where
mistakes are made and these can often prove costly to the
business. In addition, these errors may be subject to penalties
and interest. HMRC can look back up to four years when
assessing for errors.
When errors are disclosed to HMRC on a voluntary basis it
may be possible to mitigate the penalties.
*
Finance and Leasing Association - February 2016.
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