VAT Rate Change – Watch your Profit Margins
22/10/2009
The impending standard rate VAT increase is being used as a marketing tool for new vehicle sales by many dealers and manufacturers but have you considered the effect on your used stock?
If we look first at VAT qualifying used vehicles purchased before the rate change, a potential problem arises if you do not sell the vehicle until after the rate change has taken effect. This is best illustrated with an example.
Consider a vehicle purchased for £10,000 plus VAT of £1,500 which you decide to display for sale at a VAT inclusive price of £14,000. If the sale takes place before the rate change you will account for output VAT of £1,826 leaving you with a profit of £2,174. If the sale takes place after the end of December however, are you really going to be able to increase the sticker price to take account of the increased VAT you will have to account for? If you do not, the output VAT burden will increase to £2,085 eating into your profit margin by £259.
The situation is similar with non-qualifying vehicles. As output VAT will be calculated at the new increased rate on the same profit margin, your business will retain less of the sales value of the vehicle.
We would recommend that you pay particular attention to the vehicles currently in your used stock to ensure VAT does not take a bite out of profit margins.
If you would like any further details about how the rate change will affect your business please contact Michelle Malone.