The majority of people these days acquire their cars using finance arrangements such as hire purchase (HP) or personal contract purchase (PCP), rather than buying them outright. In most, but of course not all, cases the finance is brokered by the motor dealer, who also negotiates the value of any vehicle part exchanged for the new car.
There is a common practice in the motor trade to manipulate the value of part-exchange vehicles in order to satisfy the requirements of a finance company for a minimum deposit, this is called bumping, and will cause a problem with the accounting of the VAT.
The problem usually occurs when the value in the sales invoice does not match the value used in the vehicle finance system. Where these systems are not reconciled, an under-declaration of output VAT can arise.
The example below show how this works in practice:
| Sales Invoice | Finance Document |
New Vehicle | £12,000 | £14,000 |
VAT | £2,400 | £2,800 |
Total Cost | £14,400 | £16,800 |
Less Part Exchange | £800 | £3,200 |
Balance from Finance House | £13,600 | £13,600 |
In this example VAT may have been under declared by £400. HMRC is clear that the vehicle value shown on any documentation raised to the finance company must be the same as the value declared for VAT purposes.
HMRC are acutely aware that this happens and if the motor dealer has a VAT inspection it is something that will be scrutinised. HMRC is currently writing to specific motor dealers to warn them about VAT errors that can occur when a car value is bumped to meet minimum deposit requirements of the finance company, or to disguise negative equity.
If you are a motor dealer it is essential that you check your processes to ensure the correct amount of output VAT is being accounted for.
If, when checking you find that this is not the case, the error should be corrected on the next VAT return to be filed. It is also important to look at all historical transactions of this nature and ensure these are, where necessary corrected.
Further reading on this can be found on the government website where you will find the following manuals.
