FOCUS ON: VAT IN THE MOTOR INDUSTRY

Recently HMRC has been targeting the motor retail industry in relation to VAT compliance. Our experience has revealed that as part of routine VAT inspections, there are three key areas of interest: partial exemption; Capital Goods Scheme; and VAT recovery on deal costs.

Partial exemptionIt has been estimated that over 80 per cent of private new car sales are purchased on finance. In 2016, more finance backed sales have been arranged than ever before*. As a result of this, VAT exempt income is increasing and VAT recovery on underlying costs may require restriction. Motor retail businesses should therefore take extra care when determining their VAT recovery position.

The partial exemption default calculation used to determine the amount of VAT recovery, is known as the standard method. When VAT exempt income (eg finance commission) represents more than one per cent of total turnover, an input VAT recovery restriction on overheads may be required.

It can be difficult to determine what should be included as an overhead item for partial exemption purposes and this area often requires specialist advice.

The standard method normally results in relatively high levels of restriction and so we often negotiate partial exemption special methods’ for our clients with HMRC which better reflects the business activities.

Capital Goods Scheme (CGS)Motor retailers are often required to refurbish showrooms to improve customer experience and keep pace with manufacturer’s expectations. Depending on the values involved, these regular refurbishments can be CGS items.

Consideration should be given on the amount of VAT incurred on refurbishments or construction that can be recovered in relation to the build. VAT recovery on these large projects is normally calculated in line with the partial exemption recovery percentage. These rules can be complex if the build falls into two different partial exemption periods.

CGS items should be reviewed on an annual basis and the relevant adjustment made where applicable.

VAT recovery on deal costs As the motor industry continues to grow, acquisitions and disposals are becoming more common.

VAT recovery on deal costs has been a hot topic with HMRC over the last few months. Careful consideration should be given when determining the extent to which VAT can be recovered in relation to the costs incurred during corporate transactions to both acquire and dispose of businesses or parts of a business.

HMRC penaltiesThe points mentioned above are common areas where mistakes are made and these can often prove costly to the business. In addition, these errors may be subject to penalties and interest. HMRC can look back up to four years when assessing for errors.

When errors are disclosed to HMRC on a voluntary basis it may be possible to mitigate the penalties.

*Finance and Leasing Association - February 2016.

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The UK group of companies and LLPs trading as RSM is a member of the RSM network. RSM is the trading name used by the members of the RSM network. Each member of the RSM network is an independent accounting and consulting firm, each of which practices in its own right. The RSM network is not itself a separate legal entity of any description in any jurisdiction. The RSM network is administered by RSM International Limited, a company registered in England and Wales (company number 4040598) whose registered office is at 50 Cannon Street, London EC4N 6JJ. The brand and trademark RSM and other intellectual property rights used by members of the network are owned by RSM International Association, an association governed by article 60 et seq of the Civil Code of Switzerland whose seat is in Zug.

RSM UK Consulting LLP, RSM Corporate Finance LLP, RSM Restructuring Advisory LLP, RSM Risk Assurance Services LLP, RSM Tax and Advisory Services LLP, RSM UK Audit LLP and RSM UK Tax and Accounting Limited are not authorised under the Financial Services and Markets Act 2000 but we are able in certain circumstances to offer a limited range of investment services because we are members of the Institute of Chartered Accountants in England and Wales. We can provide these investment services if they are an incidental part of the professional services we have been engaged to provide. Baker Tilly Creditor Services LLP is authorised and regulated by the Financial Conduct Authority for credit-related regulated activities. RSM & Co (UK) Limited is authorised and regulated by the Financial Conduct Authority to conduct a range of investment business activities. Whilst every effort has been made to ensure accuracy, information contained in this communication may not be comprehensive and recipients should not act upon it without seeking professional advice.

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How RSM can help

Our experienced VAT team is able to assist you with the following issues:

• VAT compliance review;

• partial exemption advice and calculation reviews;

• negotiating a special method for partial exemption with HMRC;

• Capital Goods Scheme advice and calculation reviews;

• correcting errors;

• mitigation of errors;

• managing HMRC queries;

• VAT grouping and VAT grouping reviews;

• VAT returns and advice;

• land and property transactions; and

• VAT recovery on acquisition and disposal costs.

If you would like to discuss anything further please contact Charlotte Stanley or your usual RSM adviser.

Charlotte StanleyVAT Manager

+44 (0)23 8064 6656 charlotte.stanley@rsmuk.com