In a typical finance transaction, the customer and dealer agree the purchase price of the vehicle. The dealer sells the car to the finance company and the finance company immediately sells the car to the customer on agreed finance terms. If a dealer offers a DDC, it's usually described as a contribution by the dealer towards the required deposit.
HMRC note that some dealers and finance companies account for VAT based on the headline price. The DDC is then deducted from the payment due after the VAT has been calculated. This results in the dealer accounting for too much VAT due to calculating the VAT element on a higher amount than the customer actually pays.
HMRC have now advised that VAT should be calculated on the price actually paid by the customer having deducted the DDC first. The basis for this approach is that the DDC is taken into account during the price negotiations and is not a retrospective adjustment.
Dealers: will need to correct any VAT that has been miscalculated by either claiming for overpaid tax or adjusting VAT returns adopting the normal error correction process.
Finance companies: should not need to make any corrective action on the basis that they should be in a tax neutral situation.
VAT registered business purchaser: businesses that purchased the car and benefitted from a DDC will have recovered too much VAT if they recovered the VAT based on the price shown in the finance agreement rather than the price reduced by the DDC. Such businesses will need to follow the error correction procedure.
Further details of HMRC's statement can be found here.
If you wish to discuss the HMRC announcement, please contact Karl Pocock or another member of the Birketts Tax Team. Law covered as at August 2018.