The government is to introduce a new tax scheme for the motor industry in an effort to boost the beleaguered sector.

The Minister for Finance, Brian Lenihan, has agreed to implement a Vat margin scheme, in use almost universally throughout the EU, on secondhand cars from the beginning of next year. The move is designed to help dealers reduce the growing stock of second hand cars on their forecourts.

The scheme will be introduced in the budget and enacted in the Finance Bill, according to the Department of Finance. The move follows lengthy negotiations with representatives of the motor industry.

Sales of new cars have fallen by almost two thirds this year, and car dealers are facing mounting financial pressures. If there is no rally in sales, 2009 will represent the industry’s worst year since 1988.

Under the new scheme, dealers will account for Vat on their profit margin – the difference between the cost of acquiring the car and its reselling price – rather than pay Vat on the selling price.

The government hopes that this will allow dealers to reduce the price of stock on their forecourts to reflect the lower Vat they will be required to pay. The department said the arrangement would apply to all secondhand cars purchased and re-sold after January 1, 2010.

The government intends to introduce transitional arrangements to take into account stock held by garages and car dealerships.

Ireland and Denmark are the only EU member states which do not apply the margin scheme to secondhand vehicles. The scheme was introduced by the EU in 1994, but Ireland negotiated a derogation following strong representations from the motor trade at that time.

The Department of Finance said that the introduction of the scheme would bring Ireland into line with other EU member states.

The government had introduced a similar scheme in the supplementary budget in April, but it was not enacted as the motor industry said it was not in the best interests of the sector.

The industry had called for a car scrappage scheme similar to the one introduced in Britain.

However, following negotiations between government and the car sector, a revised Vat margin scheme will now be introduced.