Clause 22 - Use of stock in trade cars for consideration
Finance Bill
10:00 am
Mr John Healey (Economic Secretary, HM Treasury; Wentworth, Labour)
As I have said, I will do my best to answer that in the course of my remarks.
Clause 22 counters a serious VAT avoidance scheme as part of our wider determination to clamp down on artificial and abusive tax avoidance activity. The changes that we are making will tackle underpayments of VAT on the private use of demonstrator cars—cars that are used in the motor trade for demonstration purposes but that are also made available to sales staff for their private purposes on weekends and evenings and at other times when they are not being shown to customers. Using a tax avoidance scheme promoted by many tax advisers, some motor dealers and manufacturers are paying a only tiny fraction of the VAT that they ought to pay when they make demonstrator cars available to employees.
Where a demonstrator car is not used wholly for business, dealers and manufacturers are required to account for tax on the provision of the car to the employee for private use. That is based on the full cost of providing the car. Using rates agreed with the major motor trade bodies, the VAT due is normally about £120 to £140 per employee per year. However, by charging the employee a nominal sum for the use of the car—typically £1 for a couple of years' use—some businesses have at a stroke been able to limit their tax exposure to the VAT on only this nominal amount. To answer the hon. Gentleman's question, this avoidance scheme works because in VAT even the smallest amount of consideration—even £1 a year—counts as payment for a supply. The result of this is the loss of virtually all the tax that should be due.
I have explained the scale of the current revenue loss and the scale of the full revenue loss if the scheme were to be expanded to full capacity. For some of the larger businesses in the motor trade, the loss runs to hundreds of thousands of pounds a year. The changes that we are making will give Customs the power to direct an open market valuation when a car is supplied for a consideration by a motor dealer or manufacturer to an employee and its value is artificially low.