Vroom! We took £3m off the taxman

Caffyns, based in Eastbourne and employing 800 people at 32 showrooms across Sussex, was wrongly charged £1.5 million by Customs and Excise between 1973 and 1996.

It is now looking forward to a full refund plus £1.9 million interest.

Company finance director Mark Harrison said: Were very pleased the issue has been resolved.

The rebate follows the unravelling of one of the biggest blunders in the collection of the tax since its introduction in 1973.

From the outset, Customs had been ignoring an exemption and wrongly charging VAT on demonstration and courtesy cars used by motor dealers.

When the overcharging was identified last year, VAT rules meant claims could only be made dating back six years.

But in 1996, Customs halved the back-claim period to three years to stem rising costs a move which triggered a court challenge by Marks & Spencer.

In May, after a lengthy and complex case, the European Court of Justice ruled there should have been a transitional period before the deadline was chopped. It meant the clock was reset on all claims, opening the floodgates for sections of the motor industry to apply for compensation dating all the way back to 1973.

The total cost to Customs is believed to be about £750 million.

Mr Harrison said: It seems we were overcharged on demonstration and test-drive vehicles for the period in question. They had special tax rules that were mistakenly not applied.

Caffyns was established in 1865 and the newly launched Austin Allegro would have taken pride of place in its showrooms when the taxman began overcharging in 1973.

The company was still being billed too much when the first Skoda Octavia rolled off the production line in 1996.

The exact figure for compensation will not be known until the firm publishes its interim results to September 30. It will be used to pay off debts and invest in expansion.

Caffyns showcases 14 vehicle brands, ranging from Audi and Chrysler to Rover and Skoda.