The supply of used cars on the Irish market and the prices paid for them by consumers could both begin to improve later in 2023 thanks to new tax changes announced by the UK government.
Since January 1, 2021 - the end of the UK's transition period following its exit from the EU - cars imported to the Republic of Ireland from Britain and Northern Ireland have been subject to not just Vehicle Registration Tax (VRT) and customs duties, but also a double-whammy of UK VAT and standard Irish VAT (at 23 per cent), drastically pushing up the prices of used cars and contributing to a serious supply shortage. The changes announced by the UK government, however, would see dealers both in Northern Ireland and EU countries able to claim back a refund from HMRC (the UK's revenue service) up to 16.67 per cent of the purchase price of a used car, offsetting a substantial chunk of the cost of importing a second-hand vehicle, potentially making it more attractive for dealers to do so.
The situation at present
In the UK (including Northern Ireland) at the moment, the VAT payable to HMRC by dealers on second-hand cars is calculated on a margin basis; the VAT due is one sixth of the difference between the purchase price of a car and its sale price. The use of that margin system in Northern Ireland is in breach of the Northern Ireland Protocol agreed between the UK and the EU as part of the Brexit withdrawal agreement and so cannot continue indefinitely.
Although not all used cars from Northern Ireland are subject to 23 per cent VAT on import, most cars imported from Britain are. That double-payment of VAT in both the UK and Ireland (on top of VRT and potential customs charges) creates a disincentive for dealers to import cars as, in order to cover their costs, the eventual sale price (especially when the Irish VAT paid by the customer is added) may not make a UK import competitive with cars originally sold in Ireland.
A combination of changes to the Republic of Ireland's VAT and VRT regimes since the UK left the EU and the increased demand for used cars brought about by the global supply-chain crisis has seen the value of used cars shoot upwards since the onset of the Covid-19 pandemic.
What the changes mean
The changes to the VAT rules would do away with the margin system, bringing the UK government and Northern Ireland legally into line with the Northern Ireland Protocol.
"The refund scheme mimics the effect of the margin scheme by allowing dealers to claim a 'refund' of an amount equivalent to one-sixth of the purchase price of a used car as if it were input VAT, when it is moved to Northern Ireland to be sold there or in the EU," explained Glyn Edwards, VAT director at the UK accounting firm, MHA.
"The sale will then attract VAT at 20 per cent on its full value if sold in NI, or at the standard rate applicable if sold in other EU countries."
For dealers in Northern Ireland, the new scheme is unlikely to lead to any major changes when compared with the current margin system. The scope of the new scheme, however, could be of significant benefit to dealers south of the border.
According to HMRC, the refund scheme will also be open to EU dealers, though it said the specifics have yet to be finalised and will be confirmed at a later date.
The government in Dublin has not announced any changes to the taxation regime here, meaning that second-hand cars would still attract all of the same VRT, VAT and customs charges as they presently do.
The ability for Irish dealers to reclaim some of the purchase price on vehicles imported from the UK could, however, make the difference on an imported car being profitable to sell or not, which may mean an increased supply of UK imports on the Irish market, deflating (partially, at least) the current used car price balloon. Although it remains to be seen if that happens given that the UK is experiencing the same lack of supply, with the associated increases in used car pricing.
When is this due to go into effect?
According to HMRC, those purchasing a used car in the UK will be able to make their first refund claims from August 2023, though the mechanics by which this will happen are still being worked out.
Hence, it's still not entirely clear what vehicles will be eligible for the scheme or when the cut-off date falls.
"Vehicles in stock prior to 1 May, 2023 are not eligible for a refund, but can continue to be sold using the traditional margin scheme as long as they are sold by 31 October 2023. Vehicles sold after that date will be liable for VAT on the full sales price," said Edwards, referring to how the system will operate in the UK.
Though it hasn't been confirmed, this could potentially suggest that, once the claims mechanism opens in August, Irish dealers may be able to request their refund from HMRC on used cars imported after May 1.
Further reading
Guide to Importing Cars from the UK
How Much VRT is Paid in Ireland?