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HM Revenue and Customs Brief 31/09

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HM Revenue and Customs -Tax Authorities

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Issued 14 May 2009


Tax implications of the Vehicle Scrappage Scheme

The government announced at Budget 2009 the introduction of a temporary vehicle scrappage scheme. It is a voluntary scheme which will be administered by participating motor manufacturers and dealers, along with the Department for Business, Enterprise and Regulatory Reform (BERR). Information about it can be found on the BERR website and at Directgov - Motoring. You may also contact BERR’s enquiry unit on Tel 020 7215 5000, or email the BERR Automotive Unit with 'scrappage' entered in the subject heading.

A. VAT and direct tax profits implications

Vehicles supplied under the scheme will be subject to the normal VAT and direct tax rules. The purpose of this brief is to explain how those rules apply to the £1,000 subsidy payable by BERR on qualifying supplies made under their scheme, plus the £1,000 discount paid by the manufacturer.

Manufacturers

If you are a manufacturer participating in the scheme you will be providing a £1,000 subsidy to the final consumer (over and above any other subsidy or discount you might provide), even though you have no direct contractual relationship with them. You may treat the VAT on your contribution as a discount to the output tax you have paid to HMRC on your sale of the car. You may therefore reduce your output tax by the appropriate VAT amount (which on a gross payment of £1,000 and the current standard rate of VAT of 15 per cent means £130.43). Any such adjustment should be made in the period in which it takes effect in the business records of the manufacturer. This treatment is in accordance with the decision of the European Court of Justice in Elida Gibbs Ltd v Commissioners of Customs and Excise. [1996] EUECJ C-317/94 (24 October 1996) (opens new window) and Commission v Germany (Taxation) [2002] EUECJ C-427/98 (15 October 2002) (opens new window)]. Guidance on the VAT treatment of such payments by manufacturers was given previously in Revenue and Customs Brief 08/07

You must not reduce your output tax in respect of BERR’s £1,000 contribution. Under the terms of the scheme, BERR will pay you £1,000, but you must pass it on to the dealer within 14 days who, in turn, is obliged to ensure that the final consumer receives the benefit of that sum. You are thus acting as a conduit, receiving and passing on BERR’s third party payment to the dealer. The £1,000 subsidy provided by BERR is not a discount on the value of your supply, and so you should make no adjustment in respect of that payment.

For direct tax purposes BERR’s £1,000 contribution has no overall effect on the trading profits of the manufacturer. The corresponding £1,000 payable by the manufacturer to the dealer will be an allowable deduction for the purposes of computing the profits of the manufacturing trade.

Dealers

If you are a dealer participating in the Scheme and the manufacturer uses the arrangements above, the cost of the new vehicle received by you is unaffected, and you should make no adjustments to the VAT you pay to the manufacturer, or claim from HMRC as input tax. As explained above, the manufacturer is not providing a £1,000 (or greater) discount to you as part of the Scheme – they are providing it to your customer. Your selling price for the vehicle has not changed and you must not reduce your output tax. Whatever your final VAT-inclusive ( 'On The Road ') selling price of the new vehicle is, under the Scheme your customer pays £2,000 less, with the balance of the consideration being made up of the two £1,000 subsidies. Under the Scheme, it is important that it is clear to your customer that they are paying £2,000 less than would otherwise be the case – see Directgov - Motoring (opens new window)

The effect of the Scheme on the dealer is neutral for the purposes of computing trading profits. The £2,000 reduction in the sale proceeds received from the customer is matched by the £2,000 trade receipt received in the form of the subsidies paid to the dealer under the scheme.

Customers

Customers buying a new vehicle under the scheme will pay £2,000 less for the vehicle, since BERR will be paying £1,000, and the vehicle manufacturer will be paying £1,000 towards the cost of the purchase. The subsidies will be settled between the manufacturer, dealer and BERR so you will not physically be paid these amounts.

If you are VAT-registered and buy a new car or van under the scheme, you may need to reduce your input tax in respect of the manufacturer’s discount. However, you only need to consider this if you are entitled to claim VAT on the purchase of a vehicle – for example, on certain commercial vehicles, or a car that is intended to be used primarily as a taxi; driving instruction car, or self-drive hire (but see paragraph 3.1 of VAT Notice 700/64 ‘Motoring expenses’). If, under the normal VAT rules, you are entitled to reclaim the VAT you are charged on the purchase of a new vehicle and you buy one under the Scheme, you must reduce the input tax you claim in proportion to the manufacturer’s discount. This is because, at the beginning of the chain of transactions culminating in your purchasing the vehicle, the manufacturer will have reduced its output tax. Therefore, since the manufacturer contributes £1,000 and the standard rate of VAT is 15 per cent, you must reduce your input tax by £130.43. You will not receive an amended invoice or credit note. This is the normal VAT treatment for business customers receiving such manufacturer’s discounts - see Revenue and Customs Brief 08/07

B. Capital allowances

A business purchaser of a vehicle under the scheme will only be able to claim capital allowances on the net cost to it (after the two subsidies have been deducted). However, the vehicle surrendered by the business consumer will be scrapped and therefore it has no value as a vehicle, in terms of the scrappage scheme. The two subsidies given as deductions from the purchase price will not constitute taxable disposal receipts for capital allowances purposes.

If you need further advice and are a large business with an allocated Customer Relationship Manager, you should consult them. Otherwise you should contact our National Advice Service Helpline on Tel 0845 010 9000, or by email, or by writing to:

HM Revenue & Customs
National Advice Service
Written Enquiries Section
Alexander House
Victoria Avenue
Southend
Essex
SS99 1BD

Please include your VAT registration number and the name and address of your business in any correspondence. If you are not VAT registered please include your name and address.


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© Crown Copyright 2009.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2009-05-15 16:08:44 in Tax Articles

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