VAT Accounting on Dealer Deposit Contributions (DDC) in Motor Retail Trade

HMRC in its latest policy has recognised that motor dealers, finance companies and customers have adopted different VAT accounting systems (mostly applying Regulation 38ZA) when they are making error corrections for vehicles that have been purchased under dealer deposit contributions (DDC). In its latest policy, it has clearly laid down the rules on how to make error corrections for past purchases. These rules are applicable on companies financing the final customer for the sale, retailer/owner of the motor vehicles (both old and new) and VAT registered business purchasing the vehicle under the DDC.

What is DDC?

Dealer Deposit Contributions (DDC) are the discounts offered on the initial deposit by the dealer to the customer who has to pay the initial deposit amount to the finance company when purchasing a new or old car. Usually when a customer buys vehicle on finance from the dealer, the dealer takes care of all the paperwork of the finance company. The dealer makes the sale to the finance company and the finance company in turn makes the sale to the customer where the purchase price has already been decided between the customer and dealer. For instance if you are purchasing a car worth £30,000 and financing it for £25,000, then the initial deposit amount will be £5000. On this amount your dealer might contribute £3000. So the headline price for your car would be £27,000 and you will have to pay initially £2000 as deposit amount. Deposit contributions can only be availed by the customer when they are financing their car. They are slightly different from a normal discount offered by the dealer or the manufacturer. In case of deposit contribution although some amount is discounted but that discount depends on the finance plan like PCP. Based on the finance plan ultimately the interest that the customer has to pay might go higher and hence the deposit contribution might seem less valuable as compared to the discount option.

How to account VAT for DDC?

Dealers generally account for VAT on the headline price (£30,000) and then deduct DDC from the payment due. By deducting the DDC after the VAT has been calculated and by bearing the burden of the DDC (£3000) dealers are over paying VAT as they account for more VAT than the customer pays. However as per HMRC’s policy, VAT is to be calculated on the discounted amount (£27,000) which is actually charged to the finance company and the customer.

This false calculation can be corrected in two ways –

• Make a claim on section 80 for tax being overpaid
• Follow the VAT Notice 700/45 for adjusting VAT returns

Generally the dealers apply Regulation 38ZA which is incorrect since it is applicable only in cases where the manufacturers have made the discounts.

Most of the dealers apply VAT on the headline price rather than on the discounted price due to which they have to pay a higher tax. And this is where we can help you out on reclaiming additional tax paid. By correctly adjusting VAT returns we can ensure that you do not end up paying higher taxes then required.

About the author

Sumit Agarwal
Sumit Agarwal (ACMA ACA India), the Managing partner of dns accountants is a highly respected accountant with expertise in helping owner-managed businesses.