By charging salesmen and other employees as little as £1 for the private use of demonstrator cars, motor traders only had to pay VAT of 17.5% on the £1.
However, tax experts warn that the law is to change with effect from January 1, 2005 and VAT will be due on the 'open market value' of the use of the vehicle, which could add thousands to the VAT bill.
Simon Newark, a member of the motor trade group at UHY Hacker Young in London said dealerships must beware.
"In the past, Customs and Excise had an agreement with the Retail Motor Industry Federation about how to calculate VAT, but over the years this has been abused by many motor dealers," he says.
"The loophole had saved motor retailers thousands in VAT. Although it was a legal avoidance mechanism, Customs and Excise has decided that dealers were taking advantage of the scheme and enough was enough."