Last week, Keypoint associate director George Campbell outlined some complications and impacts of VAT for businesses in the financial services sector.
This week, he examines another complex industry from a VAT perspective: the automotive sector.
While VAT has had a relatively minor impact on auto sales (which were already declining) across the GCC, challenging market conditions have been compounded by the requirement to comply with a new VAT regime in Saudi Arabia and the UAE.
“As lead VAT adviser to large motor dealers and manufacturers globally, I have seen first-hand the difficulties that VAT can pose to accounting processes and compliance,” said Mr Campbell.
“Look no further than the amount of EU case law concerning the supply of motor vehicles and auto-related goods and services.
“One key complication for dealers is the provision of finance.
“Conducting VAT-exempt finance activities causes dealers the same issues with input tax deductions we saw last week with financial services institutions.
“Regulatory issues aside, you don’t have to be a financial services organisation to provide financial services for VAT purposes – a matter recently clarified by Saudi Arabia’s General Authority of Zakat & Tax (GAZT).
“In the GCC, auto dealers are typically part of large family groups that,often operate an in-house vehicle finance company.
“Businesses must carefully consider how VAT can be recovered not just for the vehicle finance company but for the family group as a whole.
“If the family group chooses to be ‘grouped’ for VAT purposes, providing financial services could ‘taint’ VAT recovery for the whole group.”
VAT for automotive businesses is further complicated by a number of sector-specific transactions, such as vehicle trade-ins.
Dealers must be particularly careful to charge the correct amount of VAT on sales of part-exchanged motor vehicles, particularly where a favourable trade-in valuation is given to meet minimum finance deposit requirements – a practice known as ‘bumping’.
The onward sale of traded-in vehicles could further complicate accounting, record keeping and documentation requirements for Bahraini dealers, with the potential for application of profit-margin VAT accounting schemes for the sales of second-hand vehicles, as seen in the UAE.
The VAT treatment of demonstrator vehicles can also be complicated as demonstrators are often used privately by employees.
VAT incurred on assets used privately (or available for private use) is typically blocked from recovery.
If exclusive business use cannot be proved, this may also extend to ‘stock in trade’ vehicles.
VAT regulations in both the UAE and Saudi Arabia specifically block the recovery of input tax on motor vehicles not exclusively used for business, and Bahrain is expected to follow suit.
“VAT will affect all of Bahrain’s economic sectors, though it will not affect them all equally,” added Mr Campbell.
“The automotive sector is a key private sector employer and a wealth generator – as well as being an important economic bell-weather.
“Automotive sector businesses should begin to assess the impact of VAT without delay.”