Revenue and Customs Brief 7/18 - VAT - motor dealer deposit contributions
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This brief explains HMRC's policy on
the VAT accounting treatment of promotions where payments are made to
finance companies by motor dealers for the customer.
Published 17 July 2018
This brief explains HMRC’s policy on the VAT accounting
promotions where payments are said to be made by motor dealers to
finance companies on behalf of the end customer. These are often but
not exclusively referred to as dealer deposit contributions (DDC) in the motor retail
You should read this brief if you’re a:
- retailer of new and used motor vehicles
- company financing the sale to the final customer
- VAT registered business that has purchased a vehicle with a DDC
HMRC is aware that motor dealers who operate DDC type promotions have
adopted different VAT accounting treatments. This brief sets out
policy, which should be applied consistently across the industry going
forward and explains how dealers, finance companies and VAT registered
customers should make error corrections for past periods.
This brief is not concerned with manufacturer deposit contributions (MDC), which are
promotions where the manufacturer or importer of the vehicle make a
contribution to reduce the amount that the customer has to pay for the
vehicle. The manufacturer or importer can continue to make adjustments
to the VAT they have accounted for as explained in VAT information
sheet 03/14: treatment of refunds made by manufacturers on the National
Dealer deposit contributions
Normally, when a vehicle is sold on finance the purchase price is
agreed between the customer and the dealer and the dealer completes all
the documentation on behalf of the finance company.
There is a sale by the dealer to the finance company and an
immediate onward sale by the finance company to the customer.
The customer knows and agrees the final selling price
(consideration), including the amount of any deposit and the finance
terms, when the agreement with the dealer is made and the documentation
In marketing material DDCs
are described as a financial contribution by the dealer towards the
deposit required from the customer by the finance company.
For example a finance company may require a deposit from the
customer of £8,000 on a £28,000 car. Under a DDC promotion the dealer
is said to contribute (say) £2,000 towards the deposit. The
being that the customer only has to pay £26,000 for the vehicle
Some dealers and finance companies account for VAT based on the
headline price (£28,000) with the DDC then deducted from the
payment due. By deducting the DDC after the VAT has been
calculated and by bearing the burden of the DDC (£2,000) dealers
over paying VAT as they account for more VAT than the customer pays.
Some dealers have tried to correct this by making an adjustment to
their VAT account based on VAT Regulation 38ZA.
HMRC views DDCs
as a discount on the headline price charged by the dealer. The DDC is shown on the
finance and sales documentation and is agreed by all the parties to the
transactions before these take place. There is no retrospective
adjustment to the amount the customer will pay, nor the amount the
finance company will pay the dealer.
VAT is therefore due on the discounted amount actually charged to
the finance company and the customer.
For example, the headline price of a car is stated as £28,000,
is shown as being funded by £20,000 finance, a deposit (including
exchange) of £6,000 from the customer and a DDC of £2,000. HMRC
the selling price from which VAT is due as £26,000 (£28,000
price less the £2,000 discount/contribution from the dealer).
Any VAT that has been miscalculated must be corrected.
Corrections must be made by either:
- making a section 80 claim for overpaid output tax
- adjusting VAT returns following the normal error correction
process explained in VAT Notice 700/45
Some dealers may have already submitted or processed adjustments
applying Regulation 38ZA. HMRC’s view is that there is no basis
for Regulation 38ZA to be used for this correction.
Regulation 38ZA applies to retrospective discounts made by the
manufacturer or ‘first supplier’ in the UK (a UK VAT
business that starts the supply chain in the UK, such as an importer).
It does not apply to discounts agreed at the point of sale by the
This means that DDCs
are not covered by Regulation 38ZA.
Error correction notices already submitted for a Regulation 38ZA
adjustment, will, provided you have submitted appropriate information,
be treated by HMRC as section 80 claims.
Dealers who have adjusted their VAT account should review the
adjustment to make sure it conforms with the error correction procedure
explained in VAT Notice 700/45. If there is any doubt write to HMRC for
Finance houses do not have to make any corrective action. They can
make a section 80 claim for overpaid output tax but must offset the
input tax they claimed on the invoices from the dealer. There is
therefore nil net tax to adjust.
VAT registered businesses that have purchased a vehicle with a DDC and recovered all the
VAT on the price shown on the finance agreement are also affected. They
cannot claim the VAT on the DDC
element as input tax as it is not VAT, and has been included in the VAT
shown on the finance agreement in error. They should follow the error
correction procedure explained in VAT Notice 700/45.
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© Crown Copyright 2018.
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Article Published/Sorted/Amended on Scopulus 2018-07-17 15:00:00 in Tax Articles