The High Court has ruled that VAT partially exempt dealers who buy cars to use as demonstrators and have been treating them as exempt supplies may be entitled to substantial reclaims from HM Customs and Excise, says the Retail Motor Industry Federation.

The ruling was made in a case involving a dealer who argued that he should be able to treat his demonstrators as capital goods and not as motor cars when using the standard partial exemption method. 

During the appeal the dealer was buying cars as demonstrators and not recovering VAT on the purchase price, because this was blocked.  The vehicles were later sold and treated as VAT exempt because VAT had been blocked on their purchase.

When the dealer came to complete his VAT return he would perform the standard partial exemption method and include the demonstrators in his exempt sales.  The effect of including the cars as exempt supplies was to reduce the VAT the dealer could recover on his overhead costs.

The dealer took the issue to court, arguing that demonstrators should be treated as capital goods and excluded from the partial exemption calculation.  The High Court agreed with the dealer on the basis that the cars were always depreciated in the same manner as other capital items, such as workshop equipment.  The court also differentiated between demonstrator cars and stock in trade cars that the business bought to resell where VAT is already fully recoverable.

The judgement is important, according to the RMI's business development consultant, Louise Wallis.

"Firstly it defines demonstrators as capital goods, which is particularly important, because there is no general definition of capital goods.

"Secondly it may mean dealers can make some substantial claims for overpaid VAT where demonstrators have been defined as exempt vehicles and have affected the amount of VAT recoverable under the standard partial exemption calculation."

But Wallis suggests that dealers wanting to make a claim should be cautious.

"Dealers will be limited in the scope of the claim by the three capping rule.  Also many dealers will have been using the stock in trade definition for vehicles since December 1999 and will have few or no exempt car sales for the last two years.

"It is therefore likely the period of a claim will only be for about one year.  Dealers who think they have a potential claim should take advice from their accountant or the RMI before proceeding."