HMRC enquiries on car dealers and the e-signature problem

Our national Motor Retail team has seen a significant rise in HMRC enquiries at both franchised dealers and car supermarkets. The Department’s activity is yielding results with many dealers becoming embroiled in uncomfortable and damaging VAT disputes.

HMRC’s current focus is on the values declared by dealers through their Dealer Management Systems (DMS) compared to those used to obtain finance for PCP customers.

Historically, this has some similarity to the practice of ‘bumping. This is where a dealer deliberately shows a higher value on invoices issued to finance companies for a car sale, offset by a similarly higher value for the customer’s part exchange vehicle. The net amount to be financed is unchanged, and the practice is usually carried out to meet lending criteria by overstating the true value of the customer’s initial contribution.

Electronic signatures

The current variation on this theme, however, stems from the role of finance house systems. The systems used by the sales consultant when entering the details of a transaction in order to secure finance for their customer vary in both quality and the level of training given to dealers.

These resulting VAT issues have become known as the ‘E-sig problem’ – named after the electronic signature, a requirement of the customer in order to obtain finance.

The sales consultant’s main interest is securing enough finance to make the sale. They are often faced with using numerous finance systems, some of which are poorly designed. All too often non-VATable items such as GAP insurance, RFL and negative equity are also included within the sale price of the new car – because the sales consultant knows that this will produce the right amount of finance.

What the consultant doesn’t realise is that the values entered are used by the Finance House to produce an invoice on the dealer’s behalf. The values on that document will not match the invoice produced by the dealer’s own DMS, on which each of the different elements of the sale are correctly analysed.

The VAT problem arises because the accounts team at the dealership declare VAT according to the DMS document, but under PCP a car is contractually sold to the finance company. HMRC unsurprisingly regards the vehicle invoice produced by the finance house as being the true figure for VAT purposes.

HMRC are regularly issuing assessments in excess of £100k at mid-sized dealerships. This has also lead to HMRC looking closely at any other potential errors and they now arrive at dealerships with a list of potential VAT under-declarations.

So what can be done?

  • Check that finance deals are entered onto systems accurately
  • Invest time in training sales consultants
  • Ensure that there is good communication between accounts, sales and lenders to ensure that everyone understands their respective responsibilities

Dealers who have not yet been contacted should anticipate a VAT inspection and start to test systems. Early advice from specialists can help resolve the problem before or during an enquiry. HMRC know some of the solutions, but they are not always willing to share possible ways in which their assessments can be mitigated.

Get advice

If you have any queries regarding the HMRC implications mentioned in this article please get in touch and speak to a member of our Motor Retail team.

A version of this blog originally appeared on the website of MHA member firm, MHA MacIntyre Hudson.