Dealers thrown a tax lifeline in Budget 09 v1.2

ninty9er

Motor dealers have been thrown a lifeline by Lenihan in the budget as he announced he will review the way VAT is paid by the trade.

I know an awful lot of work has gone on at the top of the SIMI and in local SIMI organisations meeting Ministers in the past few months.

It seems the clawback is to be abolished and VAT will now be paid on the invoice out price as opposed to the invoice in price of a second hand cars.

The public in general won't get this, but I certainly expect this to have a knock on effect on the price of second hand cars. If it's going to cost the dealer less to sell it from July, I'll expect to be spared the difference between the clawback and July price.

Saab Ed

Well I hope it makes a difference but I think its more of a dingy in a storm than a lifeline in a pond. Too little too late IMO. The SIMI are the most useless bunch of waisters I have ever had the misfortune to have dael with. 1) VRT on imported used cars that were newly reged before July 08 need to be put back on the old VRT system so as to restore a level playing field in the market again. 2) If someone who is VAT reged at the moment imports a vehicle then that person/company doesnt have to pay the VAT on the purchase yet if the same VAT reged person /company buys the same vehicle here in the Republic they have to pay the VAT up front and claim it back putting the southern dealer at a disadvantage straight away. The balance of the purchase price might be the same at the end but on a large purchase or were there are multiple vehicles involved this will put a huge strain on a companies cash flow or force them to finance a larger amount. None of this was tackled by the SIMI in the budget.

roosterman71

Also, since people now have less money in the pocket, even if trade in prices go up a bit, it will still cost the same to trade up.

I expect to see car sales slump further.

lifer_sean

My understanding was that the clawback was an issue where the selling price was less than the buy-in price, ie when making a loss. So if a dealer was making a profit on the transaction he paid VAT on his margin and clawback didn't arise ? So is this change not just minimising losses, as opposed to directly improving profitability ????

I am aware that artificially high trade-in prices on purchase invoices can cause it to look like money is being lost on the trade-in, but extra margin being made on the new car. If the trade-in was invoiced at a realistic price then this type of "loss" could be avoided anyway.

Thoie

Am I understanding this right?

Scenario: A dealer gives you €7,000 for your old car. He then sells it for €10,000.

Under the existing rule, that €10k includes VAT at 21%. So of that €8264.46 goes to the dealer, and €1735.54 is VAT, going to the government. So the dealer's profit in this case is €1264.46? Am I right so far?


So, under the new system, keeping the same profit, the dealer still earns €1264.46, the VAT on that profit (@21%) is €265.54, and he can sell the car for €8530, keeping the same profit margin?

Or is it more likely that he'll keep the price at 10k, take €2479.34 as profit, and VAT of 21% on the profit of €520.66 ?

Or have I got the whole idea arseways?

ninty9er

Not exactly.

If A dealer makes a deal whereby I trade in my car for €10k ex VAT and 6 months later it's sold on for €5k ex VAT....the dealer pays VAT of €2150.

The change means they will pay VAT of €1075 on the €5k sale.

Thoie

So in the past if he bought your car for €10k and sold it for €12k, he'd still have paid €2150?

I misunderstood the bit below and was equating margins with profits. "Taxed on the margins" to me sounded like the VAT was only payable on the profits, so in your example if the dealer bought for €10k and sold for €5k I assumed there'd be no VAT payable as he'd be making a loss.

My emphasis

A Margin Scheme is being introduced whereby, with effect from 1 July 2009, dealers will be taxed on their margin in regard to second-hand cars they acquire and resell after that date. Second-hand cars acquired before 1 July 2009 and resold after that date will be taxed on their resale price.

Hmm, now I read it again and it still looks (to me) the same. My reading of the paragraph above is that after July 1st, a car bought and then sold pays VAT on profit section, but that if the car was bought on June 20th, then sold July 2nd, your calcs would kick in instead.

ninty9er

Thoie wrote: »

So in the past if he bought your car for €10k and sold it for €12k, he'd still have paid €2150?

I misunderstood the bit below and was equating margins with profits. "Taxed on the margins" to me sounded like the VAT was only payable on the profits, so in your example if the dealer bought for €10k and sold for €5k I assumed there'd be no VAT payable as he'd be making a loss.

My emphasis


Hmm, now I read it again and it still looks (to me) the same. My reading of the paragraph above is that after July 1st, a car bought and then sold pays VAT on profit section, but that if the car was bought on June 20th, then sold July 2nd, your calcs would kick in instead.

AFAIK the €12k above would have had a VAT cost of €2580.

VAT is payable on all purchases and sales regardless of profits.

I haven't see the exact detail of this measure yet but I expect that it will be VAT is paid on the sale price and not the trade-in price in all circumstances.

Thoie

ninty9er wrote: »

VAT is payable on all purchases and sales regardless of profits.

I haven't see the exact detail of this measure yet but I expect that it will be VAT is paid on the sale price and not the trade-in price in all circumstances.

Did a bit more digging about the definition of a Margin Scheme. This quote is from the UK, so may not be what the Irish government means but:

VAT is normally due on the full value of the goods you sell. The Margin Scheme allows you to calculate VAT on the difference (or margin) between your buying price and your selling price. If no profit is made (because the purchase price exceeds the selling price) then no VAT is payable.

(from here).

Actually, here's one from the Irish government (about secondhand goods, not specifically cars):
Section 2.2

It operates by allowing dealers in certain second-hand goods, works of art, antiques and collectors' items to pay VAT on the difference between the sale price and the purchase price of the goods.

So I think my example was right initially. For cars both bought and sold after July 1st, in the case where there's a profit, they'll only pay VAT on the profit, but if there's a loss, they won't pay any VAT.

McSpud

Thoie wrote: »

So I think my example was right initially. For cars both bought and sold after July 1st, in the case where there's a profit, they'll only pay VAT on the profit, but if there's a loss, they won't pay any VAT.

Given the delay until July I guess this will freeze up the trade in second hand cars. I would guess no dealer will accept a trade in as we approach July?

Thoie

McSpud wrote: »

Given the delay until July I guess this will freeze up the trade in second hand cars. I would guess no dealer will accept a trade in as we approach July?

Probably - a lot of dealers are already not keen about taking trade-ins at the moment.

My (uneducated) guess is that they might be a bit less keen to sell second hand cars coming up to the change date, though this will conflict with the fact that many also just want to get rid of the bloody second hand cars littering their lots at the moment.

If they take a trade-in from you that they suspect won't sell until after July, expect them to offer you approx 80% of the price they'd have offered you last week (if my maths are right).


One thing it does mean is that from July, if you get a quote showing the VAT price, you'll know exactly how much profit they're making, and what they paid for the car originally, which will change the game considerably I'd imagine.

junkyard

Too late now, the motortrade's dead just like every other business sector thanks to Fianna Failures inability to manage things, those bunch of morans have sucessfully managed this country down the toilet thanks to their arrogance and cluelessness. Next stop.....retail, i'll give it to the middle if July and we'll see the end of most of them too, thanks Brians, see ye in hell!!:mad:

ninty9er

junkyard wrote: »

Too late now, the motortrade's dead just like every other business sector thanks to Fianna Failures inability to manage things, those bunch of morans have sucessfully managed this country down the toilet thanks to their arrogance and cluelessness. Next stop.....retail, i'll give it to the middle if July and we'll see the end of most of them too, thanks Brians, see ye in hell!!:mad:

Are you still here:rolleyes:

Saab Ed

junkyard wrote: »

Too late now, the motortrade's dead just like every other business sector thanks to Fianna Failures inability to manage things, those bunch of morans have sucessfully managed this country down the toilet thanks to their arrogance and cluelessness. Next stop.....retail, i'll give it to the middle if July and we'll see the end of most of them too, thanks Brians, see ye in hell!!:mad:

Yep August bank holiday weekend will be a very very sorry weekend indeed.

junkyard

ninty9er wrote: »

Are you still here:rolleyes:

Yes i'm still here, i'm like a Nazi hunter when it comes to your shower i'll stay on your cases until enough people realise the damage FF has done to this country, if ye were any good ye'd be hanging yer heads in shame instead of starting stupid threads stating lifelines to the motortrade and the like, have you really any idea how many peoples lives have been ruined by FF bad management? And don't start with a political responce, spouting facts and figures, I for one am sh*t sick of political rhetoric.

paconnors

It was actually the greens that killed it off as you know the minister for the envioroment is gormless gormley and his dept sets the tax rates for cars.

ninty9er

junkyard wrote: »

Yes i'm still here, i'm like a Nazi hunter when it comes to your shower i'll stay on your cases until enough people realise the damage FF has done to this country, if ye were any good ye'd be hanging yer heads in shame instead of starting stupid threads stating lifelines to the motortrade and the like, have you really any idea how many peoples lives have been ruined by FF bad management? And don't start with a political responce, spouting facts and figures, I for one am sh*t sick of political rhetoric.

I'm not even going to start. You're not going to vote FF, I know it, you know it and everyone on the site that's been around a few weeks or more knows it.

You can grind your axe all you like, but I doubt you complained when income tax was falling and incomes were rising.

Goodnight.

Don't let the door hit you on the arse.

roosterman71

So would it be a good assumption now that dealers won't try to make as big a profit from second hand car sales since the VAT payable will be lower? If so, that might kick start 2nd hand car sales a bit and make it more competitive with England.

Just a thought.

Thoie

I'm assuming/hoping that that was the reason behind the government's thinking.

If you look back at my original sums, before July, garage buys car for 7k, sells it for 10k, their margin is 18%. After July, they can buy the car for 7k, sell it to you for 8.5k, and still have an 18% margin (ie, they get 1.2xk into their hands). I'm not sure what the normal margins on second hand cars are, but it all works the same.

Garage buys car for 7k, sells it for 20k pre July - margin = 136%.
Garage buys car for 7k, sells it for 18.5k post July - margin = 136%

Doing some more extremely rough sums, for every thousand the dealer has paid for the car, they have the potential to pass on €200 savings to you.

lifer_sean

Thoie wrote: »

I'm assuming/hoping that that was the reason behind the government's thinking.

If you look back at my original sums, before July, garage buys car for 7k, sells it for 10k, their margin is 18%. After July, they can buy the car for 7k, sell it to you for 8.5k, and still have an 18% margin (ie, they get 1.2xk into their hands). I'm not sure what the normal margins on second hand cars are, but it all works the same.

Garage buys car for 7k, sells it for 20k pre July - margin = 136%.
Garage buys car for 7k, sells it for 18.5k post July - margin = 136%

Doing some more extremely rough sums, for every thousand the dealer has paid for the car, they have the potential to pass on €200 savings to you.

That's not the way it works as I understand it.

Old way - car sold for profit:
Trade-in price of 7000 - VAT credit of 1239 euro
Sell price of 10000 - VAT debit of 1770
VAT liability = (1770-1239) = 531 euro (same as VAT component of 3000 euro)
Gross profit = 2469.

Old way - car sold for loss:
Trade-in price of 7000 - VAT credit of 1239 euro
Sell price of 6000 - VAT debit of 1062
Clawback rule means debit cannot be lower than credit so VAT due is 1239 not 1062
VAT liability = 0 (no nett credit even though loss made on car)
Gross loss = 1000.

New way - car sold for profit:
Trade-in price of 7000 - VAT credit of 1239 euro
Sell price of 10000 - VAT debit of 1770
VAT liability = (1770-1239) = 531 euro (same as VAT component of 3000 euro)
Gross profit = 2469. NO CHANGE

New way - car sold for loss:
Trade-in price of 7000 - VAT credit of 1239 euro
Sell price of 6000 - VAT debit of 1062
Clawback rule now gone
VAT liability = -177 (VAT refund on the loss amount)
Gross loss = 833.

Why would car be sold at a loss ? Take new car, list price 20,000. Dealer has discount of 2000 to play with. Trade-in worth 10k retail. Dealer takes 8500 from independent dealer to "blow out" the trade-in. Makes overall profit of 500 euro.

Customer invoice shows 20,000 sell price less the 10,000 he pays => trade-in on the books at 10,000.
Trade-in price of 10000 - VAT credit of 1770 euro
Sell price of 8500 - VAT debit of 1504
Clawback rule - liable for 1770 VAT on the 8500, not 1504 => hit for 266 entra VAT.
Profit now down by 266, so the 500 margin almost wiped out.

This is the way my accountant explained it to me. I'd welcome any corrections from motor trade professionals if this is incorrect.

This VAT stuff does my head in.

Lord Trollington

You can write down the line price of the new vehicle purchase.. ie
new car price €20,000.
Trade in price €10,000.

on the invoice...
Write down the top line price to €18,000, (your margin lets say)
write down the trade in price €8,000......Bottom line still remains the same. €10,000 less likely to be caught for clawback on the trade in.

in reply to why would cars be sold a a loss, well really because no one is buying any... and in order to turn stock and bring in money dealers are having to take huge hits to blow out stock bough in at last years prices, selling them off at this years price...
Cars on the forecourt are no use to dealers unless they are selling... what use is 2-3 million worth of stock sitting there, its only getting less valuable everyday.

Thoie

lifer_sean wrote: »

That's not the way it works as I understand it.

Old way - car sold for profit:
Trade-in price of 7000 - VAT credit of 1239 euro
Sell price of 10000 - VAT debit of 1770
VAT liability = (1770-1239) = 531 euro (same as VAT component of 3000 euro)
Gross profit = 2469.

I'm a bit sad, and kind of like the VAT stuff.

So, your bit above is confusing me (not saying it's wrong, just that I'm confused), and yes, we probably do need a motor trade pro at this stage!

Concentrating around this line:

Trade-in price of 7000 - VAT credit of 1239 euro

Unless the motor industry already had unique rules, I don't get why there'd have been a credit on the price the garage paid, unless they were buying it from another VAT registered company.

An analogy. I'm a VAT registered motor trader. I go to a supermarket, and buy €7 worth of bulbs. The supermarket is also VAT reg, so the receipt they give me shows that I've bought bulbs for €7 inclusive of VAT (€1.21). When I'm doing my VAT accounts at the end of the year, I can subtract €1.21 off whatever I owe the government.
But! Instead of going to the supermarket, I buy my €7 bulbs from the dodgy looking guy on the street. He's not VAT registered, he somehow manages to scrawl a receipt, but there's no mention of VAT on it. Now I cannot reclaim my €1.21 at the end of the year, because dodgy bloke hadn't paid the VAT in the first place.

Going back to our used cars, when I sell my old car to a garage, I'm not VAT registered, therefore I can't give the garage a VAT receipt, therefore I would have thought they can't claim back that.

There is another argument that at *some* stage I must have paid VAT on my old car, so maybe they're allowed work off that?

lifer_sean

whycliff wrote: »

You can write down the line price of the new vehicle purchase.. ie
new car price €20,000.
Trade in price €10,000.

on the invoice...
Write down the top line price to €18,000, (your margin lets say)
write down the trade in price €8,000......Bottom line still remains the same. €10,000 less likely to be caught for clawback on the trade in.

in reply to why would cars be sold a a loss, well really because no one is buying any... and in order to turn stock and bring in money dealers are having to take huge hits to blow out stock bough in at last years prices, selling them off at this years price...
Cars on the forecourt are no use to dealers unless they are selling... what use is 2-3 million worth of stock sitting there, its only getting less valuable everyday.

I agree. To clarify, I am painfully aware that dealers are taking an actual loss on old stock at the moment ... I have several cars in stock that will show a loss. However my example was meant to show that even in "normal" trading times (whatever they are) dealers show a paper loss on trade-ins, which is why, I assume, that the SIMI are making an issue of it.

From a VAT point of view, when taking a trade-in the best approach is to charge out the newer car at cost, and show all the margin on the trade-in. This avoids the clawback issue (as you suggest). However, the customer thinks he is after paying 20,000 for the car, but the invoice says 18,000 even thought the balance to be paid is correct. Customer gets excited. How I handle it is show no number at all on the invoice, other than the balance to be paid by the customer.

Overall I can see how the motor trade can benefit from the removal of the clawback rule. However I cannot see it making any difference (directly at least) to the consumer. Also I don't see motor dealers holding off on taking trade-ins until July as a result of it, as other posters suggest. It definitely won't cause the price of used cars to drop by 1000 or 2000 !

lifer_sean

Thoie wrote: »

I'm a bit sad, and kind of like the VAT stuff.

So, your bit above is confusing me (not saying it's wrong, just that I'm confused), and yes, we probably do need a motor trade pro at this stage!

Concentrating around this line:


Unless the motor industry already had unique rules, I don't get why there'd have been a credit on the price the garage paid, unless they were buying it from another VAT registered company.

An analogy. I'm a VAT registered motor trader. I go to a supermarket, and buy €7 worth of bulbs. The supermarket is also VAT reg, so the receipt they give me shows that I've bought bulbs for €7 inclusive of VAT (€1.21). When I'm doing my VAT accounts at the end of the year, I can subtract €1.21 off whatever I owe the government.
But! Instead of going to the supermarket, I buy my €7 bulbs from the dodgy looking guy on the street. He's not VAT registered, he somehow manages to scrawl a receipt, but there's no mention of VAT on it. Now I cannot reclaim my €1.21 at the end of the year, because dodgy bloke hadn't paid the VAT in the first place.

Going back to our used cars, when I sell my old car to a garage, I'm not VAT registered, therefore I can't give the garage a VAT receipt, therefore I would have thought they can't claim back that.

There is another argument that at *some* stage I must have paid VAT on my old car, so maybe they're allowed work off that?

Margin scheme is a special scheme and has different rules to regular VAT. That's why it's a real pain to get one's head around it (well at least I think that !). A used car invoice being sold within the trade has to be marked as "Special Scheme".

If you like this VAT stuff, I think you are more than a bit sad !!!! There are probably tablets to cure that !!!!

Thoie

lifer_sean wrote: »

Margin scheme is a special scheme and has different rules to regular VAT. That's why it's a real pain to get one's head around it (well at least I think that !). A used car invoice being sold within the trade has to be marked as "Special Scheme".

I'm OK with the margin scheme, that's not where I'm confused. I'm confused about the existing VAT rules for secondhand cars - I just don't see how/where the dealer can get VAT credit for the purchase price of the vehicle. Obviously as you've said, they can - I'm just missing how.

If you like this VAT stuff, I think you are more than a bit sad !!!! There are probably tablets to cure that !!!!

Can I buy them secondhand?