Is Reasonableness in the Eye of the Beholder? New Guidance on a Reasonable Deduction for Use

Let’s face it, vehicles don’t always work.  Sometimes, like it or not, a customer has a legitimate right to reject.  For this short post in MILS Matters, we’ll set aside the thorny question of what makes a rejection legitimate and focus instead on the perennially challenging but imminently practical next question: how much can a seller deduct from the customer’s refund for reasonable use of the vehicle?

Unfortunately, as many of our members have experienced, there’s no great answer to the question.  A very recent opinion by the Motor Ombudsmen offers some guidance by articulating a particular formula for calculating a reasonable deduction.  We’ll take a look at that and compare it to the alternatives. 

Crash Course Refresher on the Framework   

Just to set the stage, let’s review the basic framework.  The Consumer Rights Act provides for a short-term right to reject and a final right to reject. 

The short-term right to reject exists for 30 days following delivery of a vehicle to the consumer.  Importantly, the clock stops ticking if the consumer asks for a repair or replacement during that window and only restarts after the repair or replacement effort.  If a consumer rightfully exercises a short-term right to reject, the seller cannot deduct anything for use.

After this 30-day period, however, if a consumer rightfully rejects, Section 24(8) of the CRA applies and provides that “any refund to the consumer may be reduced by a deduction for use, to take account of the use the consumer has had of the goods in the period since they were delivered.”  Though fine in theory, this little provision provides no practical guidance.  That shortcoming makes deductions for use incredibly tricky, as charging too little leaves money on the table but imposing too high a deduction could result in collateral litigation and wasted court fees.

A Recent Motor Ombudsmen Opinion

In Case number/Code of Practice: 00199543, the Motor Ombudsmen offered an opinion that clarifies how its offices calculate the deduction. 

The Ombudsmen starts with the assumption that a vehicle should be expected to have 100,000 miles of relatively fault free usage before routine replacement of parts is needed.  This figure derives, the Ombudsmen points out, from Lord Denning’s decision in the 1975 case of Crowther v Shannon Motor Company.  Whatever mileage the vehicle has at the point of sale gets subtracted from this figure to reach the remaining expected mileage.  Then, the purchase price of the vehicle is divided by the remaining expected mileage to arrive at a price per mile.

Simplified, the formula is this:

So, for example, if a used vehicle with a 1 July 2021, registration and 39,100 miles was sold for £14,000, the per mile deduction for use would be 23p per mile (14,000/60,900 = .2298). If the vehicle was rejected after ten months and 5,000 miles, the seller could reduce the refund by £1,150.

How this Formula Compares to the Chartered Trading Standards Formula

As another point of reference, the Chartered Trading Standards Institute offers a slightly more nuanced and gradated variant of this formula. Essentially, the Institute’s formula relies on two key assumptions:

(1) like Lord Denning, the Institute assumes that a vehicle has a standard lifespan, though unlike Lord Denning, the Institute believes that a vehicle should last 144,000 miles over a 12-year period instead of 100,000 miles; and

(2) That lifespan should be divided into four 3-year periods, with 40% of the vehicle’s value being associated with the first 3 years, 30% with the next 3 years, 20% with years 7-9, and 10% with the final 3 years.

So, the formula for winds up looking like this:

Importantly, though confusingly, the relevant use period is identified based on the age of the car when it’s sold, not when it’s rejected. Don’t ask why, because only the dear diary entries of the people who masterminded this formula could tell us.

So, returning to the earlier example, the mileage deduction would be 16p per mile (period 1 use, since the vehicle was less than 3 years old when it was sold, so 14,000/36,000 = .388 x .4 = .155). This would result in an £800 deduction for use.

Dealership Practice

In our experience, many dealerships tend to use a much higher and much simpler calculation—often a flat 45p per mile.

This number is loosely correlated with the HMRC mileage rate for people who use their own cars for work and claim such use as a deduction on their taxes, though this number intended to cover fuel, insurance and tax. Alternatively, something like this 45p figure often appears in standard terms and conditions dealing with excess mileage charges customers must pay to a finance provider if they go over a pre-agreed mileage allowance.

So, in the example, a dealership using this approach would deduct £2,250 for use.

What’s the Best Approach?

Obviously, these three approaches offer very different outcomes.

The most conservative—the Chartered Trading Standards Institute formula—results in a per mile deduction that is almost a whooping 65% lower than the standard approach we see many members take. The middle-ground approach offered by the Motor Ombudsmen is 30% lower.

It’s worth noting that both the Institute’s and Ombudsmen’s approaches are more nuanced than the flat 45p per mile rate. Both these formula’s account for the price of the vehicle and thus link the per-mile deduction to what the customer contracted to pay. In this sense, both these formulas may be more likely to be deemed “reasonable” considering the unique circumstances of a particular case.

That said, while reasonableness in law should be more certain than beauty, each situation is unique. If the recent decision by the Motor Ombudsmen means anything, it means that you should always consult with legal counsel before settling on a per-mile deduction for use when a consumer has rightfully rejected.