The motor vehicle industry is rife with complex VAT issues. From manufacturer rebates and incentive payments to dealer financing and the profit margin scheme, finance managers are busy complying with VAT. With the National Bureau for Revenue (NBR) imposing hefty fines for non-compliance, it is more important than ever to ensure the correct VAT treatment is applied.
Repairs under warranty
In Bahrain, warranty repairs are generally performed by the motor vehicle dealer who sold the vehicle, who then seeks recovery of the costs incurred on the repair from the manufacturer. Recently, the NBR released a public clarification on the VAT treatment of repair services conducted under warranty. A public clarification is essentially the tax authority’s view on the VAT implications – so it is mandatory reading for motor vehicle dealers.
The NBR’s view is that dealers do not need to charge VAT to customers for warranty repair services as this service is out of scope for VAT – the repair services are not viewed as a separate supply to the supply of the goods.
The VAT treatment of the costs recovered from the manufacturer depends on whether the cost of the warranty was included in the sale price of the vehicle. The NBR has stated the warranty cost will be viewed as forming part of the sale price if the cost of the warranty forms an integral component cost element of the sales price of the good sold.
If the warranty cost is embedded in the sale price, VAT is only payable on any margin earned by the dealer when performing the warranty repairs.
If the dealer does not earn a margin (that is, only recovers costs from the manufacturer), the costs recovered by the dealer from the manufacturer are out of scope for VAT. The tax authority has not indicated how dealers should calculate the margin on their repair services, but as a tax invoice must be issued for taxable supplies, it seems there is potential for margins to be disclosed.
If the warranty cost is not embedded in the sale price, VAT at the standard rate (5%) is payable on the warranty repair services. This could become an irrecoverable cost for overseas manufacturers.
The NBR has clarified that extended warranties and repair services performed by third parties are subject to VAT at 5%. If warranty repair services are performed on goods sold prior to VAT implementation, the repair services may still be subject to VAT. The VAT implications of warranty repair services cannot be ignored merely because they relate to goods sold prior to the imposition of VAT.
What should you do?
Firstly, you should determine whether the cost of the warranty is included in the sale price of the vehicles you sell to customers – as this will dictate the VAT treatment of any repairs under warranty. If the warranty cost is included, you should only charge VAT on any margin earned on repairs. You will need to determine your margin, both on services and parts. As the supply is subject to VAT at 5%, a tax invoice should be issued.
If the warranty cost is not included in the sale price of the vehicle, you will need to charge VAT on the repair services.
Historically, if you have been charging VAT to the manufacturer on the full warranty repair cost, you may have overpaid VAT and should investigate how this can be recovered. If you earn a margin and have not charged VAT at all, you may owe the tax authority money. The above issues equally apply to other retailers that sell goods with a warranty.
Mubeen Khadir is a senior director at Keypoint where he leads the tax advisory function. All opinions expressed in this article are his own. For more, please follow us on Instagram, visit our website or sign up to our weekly TaxFlash. For more, please see keypoint.com or follow us on @keypointme.