International Trade is inherently beneficial. It benefits sellers by creating a wider market, bringing in sales income and extra profit. It benefits buyers by creating competition to domestic suppliers driving up quality, driving down prices and improving choice.
The Brexit deal, rules of origin and VAT all conspire against free international trade and this is most clearly apparent in the used car sector. Unlike new cars where VAT is payable whether or not a car crosses a Customs border, most used cars are only liable to VAT on the margin when sold domestically. Add a border and VAT becomes payable on the full price. Add duty at the border and the impact is huge.
In Brexit negotiations, used cars probably didn’t figure very highly in the EU’s mind. The market for right-hand drive used cars in Europe is a limited one. In Northern Europe it is essentially a trade between the UK and Ireland, with the majority of sales moving in one direction – into Ireland. Prior to Brexit, Irish and UK buyers could expect to pay the same total price when buying a used car from a UK dealer.
From 1/1/21 the cost of most used cars imported into Ireland from GB will increase by more than 30%. This is damaging to GB used car sellers whose market becomes limited as cross-border sales to Ireland become more expensive and less attractive for buyers. For Irish customers, the significant uplift on the price of used imports will drive up prices more generally as there are limited options for alternative sources of supply.
The application of VAT is perhaps unsurprising, but after news of the ‘deal’ there was expectation that duty (10% on cars) would not apply. Unfortunately, complex rules of origin mean that only used cars which originate in Great Britain avoid duty when entering Ireland. Cars built in Japan or South Korea don’t qualify, but incredibly neither do cars built in France or Germany. Those EU built cars escape duty when first entering the GB market, but cease to qualify for preferential treatment when resold back into the EU – predominantly to Ireland.
A car which an Irish dealer might previously have purchased from GB for £10,000 will now attract 10% duty unless it was built in GB. Import VAT at 21% will then be payable on the duty inclusive purchase price, raising the total price to £13,310.
Sales by GB dealers to Northern Ireland dealers do not escape unscathed either. The margin scheme cannot be applied when an NI dealer resells a used car sourced in GB, so this immediately increases the potential retail price by 20%. It’s unclear whether duty will be payable too. According to the Northern Ireland protocol, duty is only payable where goods imported into NI from GB are ‘at risk’ of being exported into the EU. Given the duty implication of a used car entering Ireland directly from GB, it seems likely that used cars (other than GB-built models) will be ‘at risk’ of entering the Irish market via Northern Ireland.
There is a strong sense that the used car market has been ignored by the EU, largely ignorant of the importance of a good source of right-hand drive vehicles for Ireland. Both Irish and UK politicians need to work hard and quickly to sort out a very damaging situation.