New VAT repayment scheme for second-hand vehicles moving from Great Britain to Northern Ireland

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After a long wait, HMRC has finally provided detailed guidance for the new repayment process that will replace the VAT margin scheme for second-hand vehicles transferred between Great Britain and Northern Ireland, and then resold.

This is an extremely welcome move, as the ongoing uncertainty over what the rules would look like left some suppliers concerned they would have an unexpected VAT liability on vehicles they sold to dealers in Northern Ireland. This led them to stop supplying second-hand vehicles altogether and at a time when sourcing stock was problematic enough, this was an added issue dealers could well do without. 

It is tempting to think this only affects dealers, but the impact on the wider supply chain comprising the various auction houses, Motability, manufacturers and DMS providers cannot be ignored.

Why has the VAT treatment of second-hand vehicles changed?

As many auto retailers will be aware, since Brexit, the Northern Ireland protocol technically prevented businesses from being able to use the normal VAT margin scheme for vehicles transferred to Northern Ireland after being acquired in Great Britain or the Isle of Man.  This would obviously have put Northern Ireland businesses at a disadvantage compared to others within the UK, as they would have needed to account for output VAT on the full selling price of the vehicle but have no input VAT to offset.  This compares to the margin scheme rules where output VAT is only paid on any profit margin.

A temporary fix was introduced from 1 January 2021 to put businesses in a similar position to those using the normal margin scheme, but a permanent solution was announced last year with the intention that it would be in place by October 2022.  This timeline has slipped and we are only now getting the full details of the new process.

What are the implications of the new VAT repayment scheme?

The scheme applies where you buy a second-hand vehicle under the margin scheme in Great Britain and then transfer it to Northern Ireland.  For eligible vehicles acquired from 1 May 2023 you are no longer able to use the margin scheme when the vehicle is sold, and instead, you must account for output VAT as normal.

If you have vehicles in stock on 1 May 2023 you can continue to sell them under the margin scheme as long as they are disposed of before 31 October 2023, otherwise VAT would have to be accounted for on the full selling price.

Under the scheme you will make a claim on your VAT return as if you had paid input VAT when the vehicle was acquired.  The amount of the claim will usually be based on the value of the vehicle when it is purchased, although there are specific rules to adapt this if it is purchased at auction, there is a delay in moving the vehicle to Northern Ireland or incentives are received on the purchase. The payment is calculated on the VAT fraction of the value of the vehicle, so currently you would multiply this by 1/6.

Under what circumstances can a repayment be claimed?

The new scheme can be used by Northern Ireland dealers and certain EU VAT-registered businesses and the vehicle must be being moved to Northern Ireland with the intention to sell it in Northern Ireland or the EU and cannot be put to another use before this. 

There are extensive record-keeping requirements and, as with all VAT rules, dealers and other vehicle suppliers must ensure they adhere to the detail of the conditions to minimise the possibility of VAT assessments if they are subject to a HMRC inspection.  With these rules being so new, I would expect HMRC to make it a focus of future compliance reviews so I would advise that you start planning new control procedures now so that they are in place for the first transactions.

I would particularly draw your attention to the need to keep a detailed stock book which is separate to the normal margin scheme records, and the requirement to obtain evidence that the vehicle has been removed from Great Britain to Northern Ireland.  With margin scheme sales, we normally rely on the DMS to create all the necessary documentation and records.  It will be interesting to see whether the DMS providers roll out a facility to account for the new scheme but it is likely that, in the short-term at least, dealers will need to come up with their own workaround to ensure all conditions are met.

Full details of the rules can be found on the HMRC website https://www.gov.uk/guidance/check-which-records-to-keep-for-second-hand-vehicles-you-move-to-northern-ireland-for-resale

Action to take before the new rules come into force?

If you think you may be affected by the new rules, you shouldn’t wait until May to ascertain the impact on your business. The following steps will help ensure you have the right processes in place:

• Assess how many affected transactions are likely to take place – the fewer the transactions, the less importance the rule change will have to you
• Contact your suppliers to find out if they will be changing any of their procedures
• Find out from your DMS provider whether they will be updating the software to make accounting for these transactions easier
• Educate your staff on what the new rules mean and start to draft procedures to streamline the processing of transactions and ensure adherence to the record-keeping requirements