Motor dealers could be eligible for a refund of VAT following new guidance from HMRC

30th July 2018

HMRC has published a clarification to the way motor dealers should calculate the VAT due on a supply where the dealer has provided the customer with a financial incentive in the form of a deposit contribution, thereby reducing the customer’s outlay.

While some dealers are already in the habit of reducing the sales value of a vehicle with the amount of the DDC before calculating the VAT due to be paid over to HMRC, many others may have been overpaying VAT. For example, if a dealer contributes £2,000 to the deposit required on a car worth £20,000, the dealer should only be paying VAT on £18,000, not the full £20,000. The amount received by the finance company remains the agreed price of £20,000 which is where the VAT confusion often lies.

According to the newly-issued guidance: “HMRC views DDCs as a discount on the headline price charged by the dealer. The DDC is shown on the finance and sales documentation and is agreed by all the parties to the transactions before these take place. There is no retrospective adjustment to the amount the customer will pay, nor the amount the finance company will pay the dealer. VAT is therefore due on the discounted amount actually charged to the finance company and the customer.”

Unfortunately, the overpaid VAT can’t be amended through a simple adjustment – a separate claim must be made to HMRC to claw back any overpaid VAT. Claims can only go back over four years, so it’s important to act fast.

It should be noted that VAT registered businesses that have purchased a vehicle and recovered all the VAT on the price shown on the finance agreement may also be impacted, where the dealer contributed to the required deposit.  HMRC has advised that these companies cannot claim the VAT on the DDC as input tax as it is not VAT, and has been included in the VAT shown on the finance agreement in error. They should follow the error correction procedure explained in VAT Notice 700/45.

If your business is affected by this guidance and you believe you may be eligible for a tax refund or need to correct an error, please contact our VAT team for advice via

To read HMRC’s guidance in full, visit: