HMRC has agreed dealerships should deduct dealer deposit contributions (DDC) from the amount on which VAT is calculated when agreeing financing contracts, following a campaign on behalf of a number of dealers by accountancy and advisory firm MHA MacIntyre Hudson.

HMRC has accepted the view that dealers should only pay VAT on the final amount that is actually paid by the customer – that is, after DDC, in which a dealer effectively subsidises the initial finance deposit, has been taken into account.

HMRC’s revision of its position opens the door for VAT refund claims from dealerships that had been paying VAT on the finance amount as agreed with the customer on the point of sale, before any eventual deposit contribution was offered by the dealership. Guidance on HMRC’s website has been updated to reflect its new position.

“The over-declaration of VAT occurs when the dealer accounts for VAT based on the overall price, with the DDC treated as if it were cash received,” said MHA MacIntyre Hudson, who was representing a group of dealer clients. “In simple terms, dealers have been accounting for VAT on their own money.”

Glyn Edwards, VAT director at the accountancy firm, added: “This decision is a significant victory for dealerships losing out on overpaid VAT.

“Those impacted have the opportunity to get a refund, and it’s vital they take prompt action now as all claims are limited to four years.

“Dealers should take note that claims must be made as error corrections. This requires a separate notification to HMRC rather an adjustment on a return, and any dealers who have made a large internal correction without notifying HMRC may be exposed to investigation.

“Dealers should seek advice on how to handle this issue and guidance on reviewing future sales documentation.”

HMRC said the revised position does not impact finance houses or distributors (including the manufacturers themselves).