Changes to used car VAT system omitted

MOTOR INDUSTRY:CHANGES TO the VAT system on used cars for dealers announced in the Supplementary Budget have been omitted from the Finance Bill at the request of the motor industry.

Despite lobbying from the industry for changes to the VAT system – along with the introduction of a scrappage scheme – it seems that dealers baulked at the impact of the changes on their cashflows when they studied the details.

According to Alan Nolan, chief executive of the Society of the Irish Motor Industry (SIMI), while dealers had sought changes to the system, the budget proposals raised day-to-day funding concerns.

“Talks over a revised scheme are ongoing and we hope to an alternative solution before the Bill is enacted,” he said.

Under the current system, car dealers can reclaim the VAT value on a used car either purchased or traded in and pay it back when the car is sold. In reality, this rebate is used to offset other VAT payments on new cars, ultimately adding to the trading cashflow of the business.

However, with increasing numbers of used cars being sold at a loss, dealers are finding that the repayment is higher than what would have been due if the VAT was charged simply on the sales margin of the car.

The budget plan would have introduced a margin-based system, but it seems there were concerns among some dealers that the withdrawal of the value of the VAT rebate on used cars purchased or traded in would have a detrimental impact on their working capital – not easily replaced with extra credit from finance houses.

Some estimates suggest that up to €100 million would have been removed from the working capital of dealers if the new scheme had been introduced.