Good news for motor dealers as HMRC clarifies the correct VAT treatment of Dealer Deposit Contributions (DDC)

Hillier Hopkins LLP

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Motor dealers, who ran a DDC type promotion in the last four years, might qualify for a VAT refund from HMRC

HMRC released Revenue and Customs Brief 7 (2018): VAT – motor dealer deposit contributions in July 2018 to clarify the correct VAT accounting treatment of promotion type transactions where dealers make payments to financing companies on behalf of the customer purchasing the car. Often referred to as dealer deposit contributions, (“DDCs”) up until now, there seemed to be some confusion as to how the VAT on DDC’s should be treated, with different dealers adopting different VAT accounting treatments.

Below we’ll discuss:

  • A brief overview of the transaction flow in car financing.
  • What exactly a DDC is.
  • Why some dealers might be due a VAT refund.
  • And finally, if you are affected by the policy, what is the right way of making error corrections and how can you claim a refund on overpaid output tax.

The transaction flow in car financing
In a normal car financing transaction, the customer and the dealer will agree on the purchase price and the dealer will subsequently complete all the required documentation on behalf of the financing company.

In the financing documentation, the customer will agree to the final selling price, the financing terms and the amount of the initial deposit they have to pay. Effectively, the dealer sells the car to the financing company whereby the financing company immediately sells the car on to the customer, although this is all done through the dealer without direct interaction from the financing company.

What exactly is a DDC?
Car dealers might run a specific type of promotion where they agree to pay part of the deposit due by the customer to the financing company.

For example, a financing company requires the customer to pay an initial deposit of £4,000 on a £15,000 car. As part of the DDC promotion, the dealer might say they will pay £1,000 of the deposit, effectively reducing the amount the customer has to pay the financing company, from £15,000 to £14,000.

DDC’s should not be confused with MDC’s, or Manufacturer Deposit Contributions. Whilst these are similar, under a MDC promotion, the manufacturer (or importer) will make a contribution towards the deposit to reduce the overall sales price. The manufacturer will be the person who can reduce the VAT due and not the dealer.

HMRC have indicated that MDC’s are not affected by this policy paper and that manufacturers, or importers, can continue to make adjustments as outlined by the VAT Information Sheet 3/2014 and Regulation 38ZA of the VAT Regulations 1995.

Why might some dealers be due a VAT refund?
Most dealers would account for VAT based on the initial headline price. In our example, if the dealer were to charge VAT at the standard rate of 20% on the £15,000, it would come to £3,000. However, the DDC is deducted from the actual payment due so the customer only pays VAT on the lesser amount of £14,000.

The end result is that the dealer has to pay over the £3,000 output VAT recorded on the paperwork to HMRC, but the customer actually pays less VAT after the £1,000 is deducted. The dealer is effectively out of pocket and can claim back the overpaid output tax.

What is the right way of making error corrections and how can you claim a refund on overpaid output tax?
VAT that has been miscalculated in the past will have to be corrected.

Some dealers have applied VAT Regulation 38ZA in an effort to correct the error. However, Regulation 38ZA is only applicable to retrospective discounts made by manufacturers or first suppliers (such as in the case of MDC’s as discussed above).

According to HMRC, they view DDC’s 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.”

Regulation 38ZA does not apply to discounts agreed at the point of sale by the dealer and DDC’s are not covered by it.

The correct error procedures dealers will have to follow are laid out in VAT Notice 700/45: how to correct VAT errors and make adjustments or claims.

For dealers who have already submitted and processed adjustment under Regulation 38ZA, HMRC will treat these cases as Section 80 VAT Act 1994 claims.

The Revenue and Customs Brief also states that financing companies do not have to take any corrective action as they can make Section 80 claims for the overpaid output tax but then offset it with the input tax they claim from the dealer invoices. The result is a nil net tax effect.

Both Vat Notice 700/45 and Section 80 claims are fairly complicated procedures, with Vat Notice 700/45 outlining two distinct methods of error correction to follow and very specific conditions attached to each of them.

There is also a four-year time limit for adjusting and correcting errors, which adds a level of urgency to the process.

If you are due a VAT refund, or just want to find out if you are eligible for one, and want to make sure you get your claim in before the time-frame has passed, please get in touch with us. Our VAT experts have experience with DDC VAT claims and can help you navigate the complex error correction procedures while making sure your claim is accurate.

Do you need extra information?

Ruth Corkin - Prinicipal - VAT and Indirect Tax Advisory at Hillier Hopkins

Ruth has been involved with VAT for over 30 years. She started her VAT career as a Customs and Excise Officer in Essex and then moved into consultancy with a variety of well-known accountancy firms. She is well known in the VAT world and is the proud author of many articles and technical works.

Contact Ruth at or on +44 (0)1908 713860

Based at the following office - Milton Keynes, Watford and London