New v Nearly New

[Mr Wolf]

Some people favour buying a car from new. Reasons include that new number plate, peace of mind that there's nothing wrong with it, pristine condition etc etc. I prefer to buy second hand (nearly new cars if possible) because I believe they can represent better value for money.

New cars attract VAT at 20% but there is effectively no VAT to be paid on a used car. I have regularly used this info to negotiate a good deal on a demo model. Lets take a car which the dealer buys from the manufacturer for £20,000. Under the VAT regulations that dealer is entitled to "claim back" from Revenue and Customs the VAT charged to him by the manufacturer ie £20,000 x 20% = £4,000. The net cost to him is therefore £16,000. When the dealer offers this car for sale to us the public its likely to be offered at £25,000. However, if the dealer then registers the car in its name, as it would if it was to become a demo model, then the car becomes used when it is subsequently sold, and no VAT is chargeable.  Knowing how much the car has really cost the dealer is important in negotiating a price to be paid with him. You might think, well I know the equivalent new car is on sale for £25,000 so an asking price for the demo model of say £22,000 sounds ok. Think again, it costs him £16,000 so start negotiating from that price!

[FROSTYBALLS]

If only that were true ......

There are two ways in which motor dealers handle VAT on used vehicles. Some charge VAT only on the profit they make on the sale of the car. This is known as the second-hand margin scheme, used by most car dealers. Others charge VAT on the total transaction cost - that is the second-hand selling price achieved. It depends on how they choose to keep their records.

Each method of charging VAT is legal, and HMRC is concerned only that the dealer tells them which scheme he is using.

[FROSTYBALLS]

Most insurers offer a new car replacement if the car is damaged beyond economic repair within the first 12 or 24 months from first registration. However, an increasing number of insurers are limiting this section of the insurance policy to the first registered owner, and as pre-registered cars have the dealer recorded as the first owner, this section of one's insurance policy may not apply if one's pre-registered vehicle is written off within the specified period.

[Mr Wolf]

The vast majority of car dealers use the margin scheme whereby they account for VAT on the difference between what they paid for the car and what they sold it for. In the example I gave the dealer bought the car for £20,000 and sells it for £22,000. He would therefore account for VAT on the difference (£20,000 /£22,000) ie 20% of VAT inc sum of £2,000 = £333.33. That means if he sells it for that price he keeps a sum of £21,666.66. He paid £16,000 for it so still plenty of scope for buyer to negotiate! Which was the point of my post.

[FROSTYBALLS]

2 hours ago, Mr Wolf said:

However, if the dealer then registers the car in its name, as it would if it was to become a demo model, then the car becomes used when it is subsequently sold, and no VAT is chargeable.

.... but VAT is still charged on the used car, be it on the profit or on the transaction, which is contrary to your post

[Heidfirst]

1 hour ago, Mr Wolf said:

The vast majority of car dealers use the margin scheme whereby they account for VAT on the difference between what they paid for the car and what they sold it for. In the example I gave the dealer bought the car for £20,000 and sells it for £22,000. He would therefore account for VAT on the difference (£20,000 /£22,000) ie 20% of VAT inc sum of £2,000 = £333.33. That means if he sells it for that price he keeps a sum of £21,666.66. He paid £16,000 for it so still plenty of scope for buyer to negotiate! Which was the point of my post.

I am sure that most dealers wished that they had 35% margins such as in your hypothetical case ... 

[Mr Wolf]

8 hours ago, FROSTYBALLS said:

.... but VAT is still charged on the used car, be it on the profit or on the transaction, which is contrary to your post

As far as the buyer is concerned no VAT is seen to be payable as there is no requirement to show it on the sales invoice (under the margin scheme). Otherwise it would serve to reveal the dealer's margin. The customer is only interested in how much he pays for the car and the 'hidden' VAT (which will not be revealed) should not be his concern.

[Mr Wolf]

9 hours ago, Heidfirst said:

I am sure that most dealers wished that they had 35% margins such as in your hypothetical case ... 

Car dealers probably don't often make 35% profit. In the case of a new car, the RRP of the new Avensis Sports Tourer Active petrol is £20,005. No doubt the dealer gets it for less than this evidenced by the fact that its not difficult to buy them retail for £17,500 through sites like CarWow. It's not unreasonable therefore to suggest that the dealer still makes a profit even on this reduced price. Whatever, his gross profit % on RRP is at the very least 14%. There is of course far more scope for dealers to make even greater profit on used cars.

[alan333]

13 hours ago, Mr Wolf said:

Lets take a car which the dealer buys from the manufacturer for £20,000. Under the VAT regulations that dealer is entitled to "claim back" from Revenue and Customs the VAT charged to him by the manufacturer ie £20,000 x 20% = £4,000. The net cost to him is therefore £16,000. 

That calculation is the wrong way round.  Selling at £20k plus vat would add £4k vat.  However, a vat inclusive price of £20k is actually around £16667 plus 20% vat at £3333, bringing the total to £20k.  The net cost in you hypothetical example would therefore be £16667.

[FROSTYBALLS]

3 hours ago, Mr Wolf said:

As far as the buyer is concerned no VAT is seen to be payable as there is no requirement to show it on the sales invoice (under the margin scheme). Otherwise it would serve to reveal the dealer's margin. The customer is only interested in how much he pays for the car and the 'hidden' VAT (which will not be revealed) should not be his concern.

The fact that dealers use VAT inclusive prices on used cars neither means there is no VAT chargeable, nor that the consumer thinks VAT isn't payable.

Someone who buys Cadbury's chocolate fingers, on which VAT is payable because of the chocolate, pays a VAT inclusive price , and just because some retailers don't separately identify VAT on the receipt or invoice doesn't mean that consumers think no VAT is payable - and the same applies to used cars. 

 

[Mr Wolf]

7 hours ago, FROSTYBALLS said:

The fact that dealers use VAT inclusive prices on used cars neither means there is no VAT chargeable, nor that the consumer thinks VAT isn't payable.

Someone who buys Cadbury's chocolate fingers, on which VAT is payable because of the chocolate, pays a VAT inclusive price , and just because some retailers don't separately identify VAT on the receipt or invoice doesn't mean that consumers think no VAT is payable - and the same applies to used cars. 

 

I agree, when someone buys chocolate biscuits or cars for that matter doesn't mean they think no VAT is payable. Most people know that some items attract VAT but they are more concerned about the price they pay rather than the separate item cost and VAT elements.

No VAT is chargeable under the margin scheme if the dealer sells the car for less than he bought it for. As I was referring to dealers buying new cars and registering them in their own name for demo purposes, I doubt that they sell these used cars for more than they bought them new. So NO VAT chargeable.

[FROSTYBALLS]

12 minutes ago, Mr Wolf said:

No VAT is chargeable under the margin scheme if the dealer sells the car for less than he bought it for. As I was referring to dealers buying new cars and registering them in their own name for demo purposes, I doubt that they sell these used cars for more than they bought them new. So NO VAT chargeable.

Where dealers use cars as demonstrators, they wouldn't be paying the full retail price for them anyway.

Furthermore, if a dealer sells cars they buy for less than they purchase them for, and hence make no profit, they won't be in business for very long ......