VAT Rate Increase – Don’t Get Caught Out by Anti-Forestalling Rules
29/06/2010
As most dealers experienced last December, a rise in the rate of VAT has two effects in the lead up to the change:
- Customers wanting to try to find ways to avoid the VAT increase, coupled with
- Increases in the complexity of any transactions which span the date of the change.
In navigating their way through these issues, it is easy for a salesman to focus solely on "doing the deal." However, there are additional layers of complexity that need to be considered before committing to "helping out" the customer:
- What is the effect on the accounting and corporation tax position of the company? If a car is invoiced to the customer before the rate change (and most dealers' year end) then will this sale be included in the profit of the company for the year and therefore be subject to corporation tax? With no invoice from the manufacturer until next year, this could significantly skew the results of the business as well as bringing forward a tax liability by 12 months.
- The same goes for VAT - output VAT on the full cost of the car will be included on the VAT return for the period the car is invoiced. If the manufacturer's invoice for the car doesn't come in until the next VAT quarter, there will be no input tax reclaim until then - this could lead to a significant cashflow hit, especially if the customer does not pay for the car until delivery.
If this wasn't a big enough problem however, dealers might also inadvertently fall foul of Anti-Forestalling Legislation which can cause an additional 2.5% VAT charge to be levied. If dealers aren't aware this extra VAT is payable on a transaction this could lead to some awkward conversations with customers if they attempt to pass this cost on to them at a later date. This legislation is already in force so dealers cannot afford to wait until the end of the year to consider whether transactions they undertake may be affected.
The Anti-Forestalling Legislation is designed to prevent the manipulation of transactions to artificially obtain a 17.5% VAT charge when the sale should have been subject to a 20% rate. If the legislation does apply to a supply, an extra 2.5% VAT charge will arise on 4 January 2011 irrespective of when the supply was made between 23 June and the date of the rate change. This means that dealers could be undertaking transactions today that have a hidden VAT charge due next year.
The legislation affects transactions where payment is received or an invoice issued before 4 January 2011 but the goods and services are provided on or after this date and one of the following conditions are met:
- The goods or services are supplied directly or indirectly to a connected person such as another business controlled by you;
- You provide or arrange funding of your customer's payment;
- You issue a VAT invoice to your customer that does not have to be paid in full within six months. Care must be taken if there is a long lead time for the supply of the vehicle to which the invoice relates. If the dealer does not require payment until the vehicle is supplied, such transactions could fall within this condition;
- The payment or VAT invoice is in excess of £100,000 and this is not commercial practice. This could catch situations where several vehicles are supplied to a customer which, although individually falling under the £100,000 limit, exceeds this when the transactions are aggregated.
- You supply rights or options to receive goods and services from you free of charge or at a discount.
It is important to note however that if a customer is entitled to reclaim in full the VAT a dealer charges to them the legislation will not apply. Additional care would need to be taken if a customer was partially exempt to ensure VAT was recoverable on a particular transaction and it is advisable that evidence is obtained from customers to confirm this.
Used stock
Another often overlooked side effect of the increased VAT rate is on used stock held across the rate change. Take a VAT qualifying car with a screen price of £9,995. If the dealer sells this car for the screen price on 3 January 2011, the taxman will take £1,488 in VAT from that sale price. Sell it a day later on 4 January 2011 and the taxman's cut rises to £1,666 - a loss of £178 out of the dealer's margin.
Dealers will need to plan well in advance of the change and decide on their strategy, for example:
- Increase the screen price (but a screen price of £10,208 is going to look a little odd)
- Bear the cost (potentially an expensive option)
- Reduce used stock as far as possible before the change - but if the dealer has to reduce the price to exit the cars this can become self defeating. It may also be more difficult if the dealer receives into stock a glut of swappers in November and December as a result of brought forward new car sales.
None of these are easy options, but thought needs to be given to how this issue will be approached well in advance of the rate change.
The same issue arises for margin cars, but as VAT is only on the margin the size of the issue is proportionately reduced - perhaps around £18 on a gross margin of £1,000.