As I was saying, Its VAT question day

As I was saying, Its VAT question day

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Client who is not registered for VAT, bought a van from a dealer for £10000 plus £2000 VAT.

Client paid deposit of £1000

Dealer issued invoice to Finance company for £10000 plus VAT £2000

Finance was for £10000 (£12000 minus deposit £1000)

Amount of Credit per Finance company agreement is £11000

So in effect the client is paying the VAT through his monthly repayments.

As the invoice was issued by the dealer to the finance company, can the Finance company not reclaim the VAT upfront and only finance £9000? 

Replies (8)

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chips_at_mattersey
By Les Howard
27th Aug 2015 15:58

Van finance

The dealer is selling the van to the finance company, who is therefore entitled to recover the VAT. However, the finance company pays VAT; and the timing depends on the nature of the agreement.

If the agreement is for hire, and the finance company retains title, then VAT is payable on each monthly amount.

If the agreement is for sale, then the supply is one of goods (Sch 4, s5, para 1; recent Mercedes Benz case relates to this), and the total output tax is due at the same time. For the finance company the net VAT is zero.

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By northernman
27th Aug 2015 16:44

leshoward

thanks leshoward, so as far as I can see from the agreement, it is a sale, a "motor vehicle conditional sale".

so i understand that the garage charges the finance co the vat and pay it to hmrc, finance co reclaims the vat in a lump at the start on the invoice, so net vat is zero.

the finance co then have provided credit to the customer for the full cost including vat (less the deposit), and the monthly repayments over 4 years include vat.

my client is in business, but not vat registered as he is below the threshold, and so can not reclaim the vat back on these,

and the finance co are obliged to charge vat on the monthly repayments?

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By jndavs
27th Aug 2015 17:14

Yes
The finance company is vat registered and must charge vat on its imcome.
The vat status of your client is immaterial to this.

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RLI
By lionofludesch
27th Aug 2015 17:29

Strange

Forty odd years into the VAT system, I found this question surreal.

Am I to tell the supermarkets that my mum isn't registered for VAT so they shouldn't charge her VAT ?

What would be the point of VAT is the buck didn't stop somewhere ?

 

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By northernman
27th Aug 2015 17:44

thanks lionofludesch

vat appears to be charged and paid twice on the one transaction.

of course, there are many items in the supermarket where your mother would not be charged vat

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Replying to Duggimon:
RLI
By lionofludesch
27th Aug 2015 18:27

In what way ?

northernman wrote:

vat appears to be charged and paid twice on the one transaction.

In what way ?

The sale to the finance company or the sale by the finance company to your client ?

You're not really thinking this through.

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Replying to Duggimon:
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By dkbs
27th Aug 2015 20:55

???

northernman wrote:

vat appears to be charged and paid twice on the one transaction.

of course, there are many items in the supermarket where your mother would not be charged vat

In case I'm missing something:

Garage sells vehicle to finance company : £10,000 + VAT (£2K) - VAT charged = £2K - VAT Charged Less Reclaimed = +£2K
Finance company buy vehicle from garage : £10,000 + VAT (£2K) - VAT reclaimed = £2K - VAT Charged Less Reclaimed = £0
Your client buys vehicle from finance company : £10,000 + VAT (£2K) - VAT charged = £2K - VAT Charged Less Reclaimed = +£2K

The same VAT is paid over to HMRC by the finance company as is reclaimed by them hence the £2K VAT charge stands as per the garage's charge.

Now... as we're talking about as some sort of vehicle "finance" agreement, there are 2 alternatives to the above scenario:

1. Hire Agreement : The first two parts of the transaction are the same but the finance company charges monthly over (say) 48 months. The finance company will reclaim all of the £2K VAT but will charge your client £208.33 + VAT (£250 gross) per month. Instead of your client paying £2K VAT ih one go, they only pay 1/48 of the total VAT per month.

2. Finance Lease : This is a common "commercial vehicle" situation. The vehicle is purchased from the garage by the client and then financed by the provider. The lease company is therefore entering into a finance (not lease) agreement. Therefore, the finance house charges no VAT as it incurred no VAT in the first place. It never owns the vehicle - just holds it as security against the debt. The client pays the VAT when they borrow money to buy the vehicle.

 

 

I wonder why you feel the finance house is wrong yet you and your client are right? In all honesty, your client is perhaps leasing one or two vehicles every 3-4 years. The finance company are probably leasing one or two thousand vehicles every 3-4 months! I think they may have the knowledge and experience to back this up?!

 

Whatever the case, your client signed the agreement with the finance company so, worrying about who pays what VAT now is pretty futile. Perhaps your client should have done this digging around before signing the agreement! Besides, if your client really is only paying £10,000 + £2,000 VAT on a lease agreement, there can be no interest, no charge for credit and no markup as that is what the garage sold it for! That sounds like a great deal and certainly not one to question!

 

And with the supermarket example. If I go to the supermarket and buy a bar of chocolate for 80p, I don't care who paid what VAT when or in what country. It costs me 80p. I can't claim the VAT back on it so, it costs me 80p. I can either buy it or leave it. I can't ask the shop assistant who paid what VAT and how much profit they, their suppliers and the manufacturer paid for it. I accept the VAT or decline the purchase. 

 

And one final comment... if your client with the van is in one of the trades that Ed Balls referred to earlier this year in "asking all trades men and women for a receipt" and has ever worked for "cash" (and I am told there are one or two cases where trades-persons have been paid in cash to avoid tax?! Admittedly, this is very rare and I'm sure nobody on here has ever heard of such a thing!!!?), he should possibly consider his glass house before throwing stones at finance companies cheating people out of tax.

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Replying to Duggimon:
RLI
By lionofludesch
28th Aug 2015 17:56

Thanks

dkbs wrote:

northernman wrote:

vat appears to be charged and paid twice on the one transaction.

of course, there are many items in the supermarket where your mother would not be charged vat

In case I'm missing something:

Garage sells vehicle to finance company : £10,000 + VAT (£2K) - VAT charged = £2K - VAT Charged Less Reclaimed = +£2K
Finance company buy vehicle from garage : £10,000 + VAT (£2K) - VAT reclaimed = £2K - VAT Charged Less Reclaimed = £0
Your client buys vehicle from finance company : £10,000 + VAT (£2K) - VAT charged = £2K - VAT Charged Less Reclaimed = +£2K

The same VAT is paid over to HMRC by the finance company as is reclaimed by them hence the £2K VAT charge stands as per the garage's charge.

Now... as we're talking about as some sort of vehicle "finance" agreement, there are 2 alternatives to the above scenario:

1. Hire Agreement : The first two parts of the transaction are the same but the finance company charges monthly over (say) 48 months. The finance company will reclaim all of the £2K VAT but will charge your client £208.33 + VAT (£250 gross) per month. Instead of your client paying £2K VAT ih one go, they only pay 1/48 of the total VAT per month.

2. Finance Lease : This is a common "commercial vehicle" situation. The vehicle is purchased from the garage by the client and then financed by the provider. The lease company is therefore entering into a finance (not lease) agreement. Therefore, the finance house charges no VAT as it incurred no VAT in the first place. It never owns the vehicle - just holds it as security against the debt. The client pays the VAT when they borrow money to buy the vehicle.

Thanks.  Pretty much my thoughts but I was too lazy to type all that out.

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