Over the past weeks, the National Franchised Dealers Association (NFDA) has written to HMRC and a number of MPs to highlight that under post-Brexit EU VAT rules, the sale price of a significant proportion of used vehicles in Northern Ireland (NI) will be subject to a 20% increase for stock purchased in Great Britain (GB). NFDA has urged HMRC to resolve the issue before the end of the year to avoid a major impact on NI and GB vehicle dealers as well as consumers.
VAT Margin Schemes
The issue arises from the status of VAT margin schemes for goods moved between GB and NI from 1 January 2021. This will apply regardless of whether there is a free trade deal agreed between now and December 31.
Margin schemes enable traders of used goods, such as vehicles, to pay VAT based on the profit earned from the re-sale of those goods, rather than the entire value of the good. This benefits consumers as it makes used cars more affordable, as the amount of VAT they pay is far smaller compared to the 20% they would pay for a new vehicle.
However, under current rules as part of the Northern Ireland Protocol, motor traders in NI will be unable to access VAT margin schemes for used vehicles they sell which were sourced from GB.
Guidance from HMRC states: "In line with EU rules, margin schemes involving goods, such as the second-hand margin schemes, will not usually apply for sales in Northern Ireland where the stock is purchased in Great Britain. The VAT on these sales will be subject to the normal rules and must be accounted for on the full value of the supply”.
Impact on motor traders
If left unamended, these rules will be a major disincentive for NI dealerships to buy used vehicle stock in GB, as it would lead to an immediate 20% increase to the sale price of these vehicles.
The problem arises because the Withdrawal Agreement keeps Northern Ireland in the EU’s Customs Union. Correspondence with UK officials suggests that the problem can only be resolved if the European Commission indicates that an exception can be agreed to enable us to set aside our current legal obligation under the Protocol.
If left unamended, these rules will not only have a detrimental effect on vehicle dealerships and consumers across Northern Ireland but also in Great Britain. We estimate that between 10-20% of used vehicles sold by our members every year in Northern Ireland are Great Britain imports and would be affected by these rules.
Given the major impact the pandemic has already had on the motor industry this year, it is simply not option for this steep increase in cost to be absorbed by motor businesses. This would increase prices for consumers looking to buy affordable used cars in Northern Ireland, particularly at a time when many people are looking for ways to avoid public transport use and help limit the spread of Coronavirus.
We strongly urge HMRC to raise this issue with its EU counterparts to seek an exemption before the end of the year.