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Is it a car? Is it a heap?

If you have ever traded in a car, you will know that the salesman will generally give you more than you expected for the old car. Sometimes the garage advertises '£1,000 minimum trade-in allowed for your old car'. Any car? Even if it doesn't go? Of course, it's really a discount on the newer car they are trying to sell you, and if your old car is actually worth something, they'll probably still bump it up to an even higher amount to make you feel better about your purchase.

There is a problem with VAT. If the dealer says your new car costs £10,000, made up of £8,000 cash or finance plus your old car valued at an inflated £2,000, the dealer pays (well, indirectly, you pay) VAT on £10,000. If the dealer says your new car costs £8,050, and puts an honest £50 on your rusting heap, then the VAT is only charged on £8,050. The dealer has made the same amount on the deal - £8,000 in money and your car - but gets to keep a lot more of it.

In a recent case, a dealer used a slightly different psychological ploy. Instead of bumping up the trade-in figure, the salesman issued a 'purchase plus voucher' which the customer could use to buy a car. In this example, the voucher might have a face value of £1,950. So the invoice would show the new car being sold for £10,000, paid for with cash, trade-in (at £50) and voucher. The Court of Appeal held that this worked as a discount for VAT - tax would only be paid on £8,050.

When all the car dealers have realised that they have been paying too much VAT on the bumped-up prices, we may all find we are being offered 'purchase plus vouchers' in future.