Taxman to pay back VAT millions to car dealers

The Inland Revenue will have to pay out hundreds of millions of pounds in rebates after overcharging car dealers for value added tax over an eighteen-year period.

Inchcape, Britain's biggest car dealer, said yesterday that it expected its rebate to be at least £30m but estimates put the industrywide figure at anywhere between £300m and £700m.

The overpayment of VAT arises out of the way the Revenue treated the sale of demonstrator and press fleet cars by retailers between the mid 1970s and the early 1990s.

In some cases, dealers ended up paying VAT twice or paid VAT on the basis of the full list price of the vehicle even if it was sold for less.

Inchcape, which specialises in upmarket brands such as BMW, Mercedes, Toyota Lexus, Jaguar and Land Rover, has been in discussions with the Revenue for the last six months over its VAT claim and expects to receive payment in the next few weeks. Other car distributors, including Reg Vardy, Pendragon and Lookers are also in negotiations with the tax authorities.

News of the rebate helped lift Inchcape shares 2 per cent to 1295p. The company was also boosted by a trading update forecasting that profits for the year to the end of December would be slightly ahead of the current market consensus of £127.7m.

Peter Johnson, Inchcape's chief executive, said that the group expected another strong year in the UK next year while Hong Kong, another important market, had begun to recover from the Sars-induced downturn early in the year on the back of rising consumer confidence.

Mr Johnson said he expected the UK market to be about 2.45 million sales next year after the record 2.55 million that will be recorded this year.

The group is already benefiting from the relaxation of the block exemption rules governing car sales within the European Union. Under the new system, a manufacturer can select which dealerships sell its cars or grant dealers exclusive rights to certain territories but not both.