VATVAL06140 - Non-monetary consideration: part exchange: bumping
It is common practice in the motor trade to manipulate the value of part exchange vehicles to satisfy the requirements of a finance company (such as minimum deposit requirements) for vehicles supplied on Hire Purchase (HP), Personal Contract Purchase (PCP), or similar products. This is referred to as “bumping”, see VATMARG 13300.
Bumping consists of the dealer increasing the value of the car he is selling as well as increasing the allowance he would otherwise be prepared to make for a customer’s own vehicle taken in part exchange. The higher values are the true values since it is those values that are applied to the transactions to enable the dealer to make the sale. The net effect of the increase in the part-exchange allowance matching the increase in sale value means that the balance due from the finance company is unaffected. However, bumping does have an effect on the overall VAT position.
It is important to remember that there are two different and distinct transactions here:
(i) the sale of a car by the dealer to the finance company (with a further transaction between the finance company and the end customer); and
(ii) the sale of a car by the customer to the dealer.
The finance company is not concerned as such with “the value” of the traded-in car.
Sales to a finance company under HP, PCP or similar arrangements are subject to VAT at the standard rate.
The vehicle values shown on any documentation raised to the finance company (i.e. the values notified to and accepted by the finance company) must always be the same as the values declared to HMRC. This includes the value of any part-exchange vehicle or cash deposit paid by the customer.
Where the customer is buying on HP, PCP or similar, it is the finance company that purchases the vehicle from the dealer. Bumping results in a disparity between the dealer’s Output Tax and the finance company’s Input Tax. Bumping can equally apply to margin scheme vehicles and will result in a discrepancy between the dealer’s sales value and the finance company’s purchase value. As the seller of the vehicle it is the dealer’s responsibility to ensure that the sale value is correctly accounted for.
The dealer’s invoice to the finance company may be created by their normal accounting system, via an on-line finance proposal system, or manually. The dealer’s “deal file” for the sale and/or their copy of the finance documentation will establish if the transaction values on the invoice match both the finance documentation and the values declared to HMRC.
The following are examples of “bumping” used to satisfy conditions of the finance company on minimum deposits. Examples 1 and 2 apply to sales of new/VAT qualifying vehicles, they demonstrate a disparity between the dealer’s output tax and the finance company’s input tax. Example 3 applies to the sale of a used vehicle, there is a risk that an incorrect value for Margin Scheme purposes may be recorded by the dealer.
1. Inflated deposit
| Description | Sales Invoice | Finance Document |
|---|---|---|
| New Vehicle | £12000 | £14000 |
| VAT | £2400 | £2800 |
| Total cost | £14400 | £16800 |
| Part Exchange | £800 | £3200 |
| Balance from finance house | £13600 | £13600 |
In this case the customer’s deposit (represented by the Part Exchange value) has increased from £800 (5.55% of gross sales price) to £3,200 (19.0% of gross sales price).
2. Disguised negative equity
| Description | Sales Invoice | Finance Document |
|---|---|---|
| New Vehicle | £8333.33 | £10416.67 |
| VAT | £1666.67 | £2083.33 |
| Total cost | £10000 | £12500 |
| Part Exchange | £5000 | £7500 |
| Settlement | £6000 | £6000 |
| Balance from finance house | £11000 | £11000 |
Negative equity is a shortfall between the value of the Part Exchange and the Settlement (amount outstanding on finance). When clearly disclosed to the finance company, negative equity has no effect on the VAT liability. In this example negative equity has been disguised on the Finance Invoice by ‘bumping’ the values of the Vehicle and Part Exchange. By structuring the deal in this way the dealer has also introduced a positive deposit of (£7500 - £6000) £1,500 (12 % of the inflated sales price per the finance documentation). This results in a tax loss to HMRC of £416.66 due to the disparity between the dealer’s output tax of £1666.67 and the finance company’s input tax of £2083.33.
3. Fictitious cash deposit
| Description | Sales Invoice | Finance Document |
|---|---|---|
| Used vehicle | £3500 | £4000 |
| Part Exchange | Nil | Nil |
| Deposit | Nil | £500 |
| Balance from finance house | £3500 | £3500 |
The fictitious cash deposit represents 12.5% of the (inflated) sales price and it is more likely that the finance company will agree to finance the deal under those circumstances. The subject of fictitious cash deposits was considered in the case of Andrew Hillas Ltd (MAN/03/435).
In Lex Services PLC (STC 73) the House of Lords considered the value of part-exchange vehicles where they formed part of the consideration for the supply of a replacement car. Lex used two amounts in their documentation - the full part-exchange price, and a lesser ‘true value’. Lex argued that only the ‘true value’ should be used in establishing the total consideration for the replacement car. The Lords found that the full part-exchange price should be used. It should be noted that the tribunal had found that this case did not involve ‘bumping’ but the approach can be used as a general guide whether ‘bumping’ is present or not. This was applied in the similar and subsequent case of N & M Walkingshaw v HMRC (2013).
Lord Walker noted that
‘in each case the finance company used the full part-exchange price in its documentation, and the tribunal found that the finance companies were not informed of any difference between the stated purchase price of a car taken in part-exchange and its true value (as stated on Lex’s form).’
Lord Walker drew on Westmoreland Motorway Services Limited [2008] (STC 431) (and indirectly Naturally Yours and Empire Stores). In particular he said that the Court of Appeal had been correct to rely on the proposition that
‘where the parties have expressly or implicitly attributed a value to that element in money terms that determines its value.’ He went on to say that ‘if a supplier wishes to give a discount it is up to him to make his intention clear.’
Lord Walker also distinguished this case from that of Hartwell plc (STC 396). In Hartwell the Court of Appeal considered two issues. Firstly it looked at whether vouchers (Purchase Plus vouchers), which were given to a customer trading in a second hand car for a replacement car were provided for consideration. In cases where the customer required finance, the finance company included the amount on the vouchers as part of the 10% deposit required for the replacement car. Where no financing was necessary the voucher acted as a discount against the replacement car.
The High Court had previously found that
‘The Purchase Plus allowance is negotiated and agreed as a reduction by Hartwell in the amount which the customer will have to pay for the replacement car. No consideration is given for it. It is simply a concession made by the salesman as an inducement to the customer to purchase. It is given and can be used whether or not any finance is involved. In the latter cases the customer simply pays less.’
The Court of Appeal focussed on ‘what does the supplier obtain for the replacement car which it supplies?’. LJ Chadwick, in reviewing the High Court decision stated
‘The judge was right to ask himself whether the Purchase Plus voucher formed part of the consideration for the replacement car; and was right to conclude that it did’, ‘the next question (as the judge recognised) is ‘what monetary value is to be ascribed to the voucher?’’.
LJ Chadwick found that the agreement by the customer to an arm’s length sale could not be given any value and therefore
‘the value of the consideration obtained by the supplier for the supply of the voucher is nil’.
The second aspect of the appeal concerned MOT vouchers, which were provided with a vehicle sold by Hartwell. Hartwell argued that they should be able to deduct the face value of the vouchers from the selling price of the car and only account for VAT on the remaining consideration.
The Court found that VAT was due on the full selling price. Two of the judges drew primarily on CPP finding that there was a single supply of the car, whilst the third relied on Kuwait to find that the MOT vouchers were supplied for no consideration.
Custom’s view was confirmed by a VAT tribunal in the case of Howletts (Autocare) Ltd (MAN/94/483), and in the case of North Anderson Cars Ltd (EDN/97/93).
Anderson is a car dealer that sells new and second-hand cars. In many cases, a customer will require finance from an HP company in order to purchase his selected car. Usually the customer hands over his old car in part-exchange. The finance company requires borrowers to put up a certain percentage of the car’s purchase price as a deposit. In order to enable its customers to meet the finance company’s requirements, Anderson engaged in the practice of “bumping”. Rather than discount the selling price of the replacement car, it inflates the value of the car taken from the customer in part-exchange and the selling price of the replacement by commensurate amounts. These “bumped” figures are entered onto the documentation sent to the HP company which, in consequence, grants the credit to the customer. Despite entering inflated amounts on the finance documentation, Anderson only accounted for output VAT on the “pre-bumped” selling price of the replacement car, contending that the lower figures represented the true value of the supply.
Anderson contended that the consideration for the replacement car comprised any cash deposit, the money from the finance company and the part-exchanged car. The value to be attributed to the part-exchanged car was the lower value because this was the subjective value ascribed to it by the parties and it reflected the economic reality of the situation. Customs contended that the inflated value had to be attributed to the part-exchanged car because this was the value that the parties to the sale of the replacement car (the dealer and the finance company) had subjectively attributed to it. The dealer had to attribute the higher value in order to make the sale, the finance company only advanced money on the basis that the sale was at the higher price and the customer agreed to those values in order to obtain the finance. This was actually the economic reality of the transaction.
The Tribunal found in Customs’ favour. Its main conclusions were that:
- Specifically, the supply of the replacement car was to the finance company.
- The parties to the above transaction were Anderson and the finance company and, although the customer played an important role, it was the value attributed by those two parties that counted for VAT purposes. The subjective value attributed by the parties was that shown in the document sent to the finance company.
- The higher values reflected the economic reality. It was the economic reality that those values were required in order to obtain the loan. The subjective value was that attributed by the relevant parties for the purposes of obtaining finance from the HP company, securing an exchange of vehicles for the customer and profit and commission for Anderson.