VAT conundrum means it’s better to buy now

Another good reason for buyers to do a deal and buy a car this side of Christmas is that not only will they pay less VAT but the dealer will pay less VAT on his profit. This means he gets to keep more of it.
In the new year the retailing of what the trade call “qualifying” used cars, which will usually be ex-company, leasing or rental cars (i.e. cars that are bought inclusive of VAT) will not only mean the dealer paying the VAT uplift on the car sold but will they also pay more VAT on the profit they make.

“VAT qualifying” determines the status of the car for VAT purposes, so if VAT has been fully recovered on a car, that car will be “VAT qualifying”. If a qualifying car is sold VAT will then be chargeable on its sale price, and recoverable by the purchaser. If input VAT recovery has been restricted on a car at any point in its life, that car becomes “Non-Qualifying”.

In basic terms this means that if the car was originally sold to a VAT registered company or individual then they will have reclaimed the VAT on the purchase price so when the car is sold on there is still a VAT element to be recovered. When the car is eventually sold to a private individual who is not VAT registered there is no further VAT recoverable.

The dealer does pay the VAT on the purchase price but then reclaims it as ‘Input Tax’. When the vehicle is sold the ‘Output Tax’ must be accounted for on the full sale price. Come January output Tax will be calculated at 14.89 % of the gross sale price, otherwise known as the VAT fraction of 7/47.

On cars that are purchased by a dealer which are non-VAT qualifying (known as “margin cars”) VAT on the profit made is still payable by the dealer so if the profit on one of these was £1,000 the VAT payable of that profit would be £130 at the moment but will rise to £149 in January.

Basically that means £19 more going to the government for every £1,000 of profit made on each car sold.
A buyer in the market for a car should keep a close lookout for the VAT busting deals that are inevitably out there and which are aimed at encouraging a pre-new year purchase.

The message is buy now if you want a bargain and let’s face it; it will certainly make sense for everyone to pay the VAT man less!