Dealer guide
VAT margin scheme for used cars. You pay VAT on your profit, not the price.
If you're a VAT-registered dealer, the second-hand margin scheme means you only pay VAT on the difference between what you paid for a car and what you sold it for. Put your numbers in below to see what you owe.
Use the price on the purchase invoice and the full selling price, including any part-exchange allowance. Prep and repair costs don't go in here.
- Your margin
- £1,800.00
- VAT to pay HMRC (margin ÷ 6)
- £300.00
- What you keep
- £1,500.00
A worked example
You buy a Ford Focus from a member of the public for £6,000, spend £400 on tyres and a valet, and sell it for £7,800.
- Margin: £7,800 − £6,000 = £1,800
- VAT due: £1,800 ÷ 6 = £300
- The £400 of prep doesn't come off the margin. If the tyre invoice showed VAT, you reclaim that separately.
- Profit after VAT and prep: £1,800 − £300 − £400 = £1,100
Which cars qualify
A car can go through the margin scheme if you bought it without VAT being charged on the invoice. In practice that means you bought it:
- from a private seller
- from a business that isn't VAT registered
- from another dealer who sold it under the margin scheme
If the invoice you got shows VAT, which is common with ex-fleet and ex-lease cars, the car is outside the scheme. You reclaim the VAT you paid and charge 20% on the full selling price.
Part-exchanges
The part-exchange allowance is part of what the customer paid for the car they bought, so it counts in that car's selling price. The car you took in then goes into stock with the allowance as its purchase price, ready for its own margin when you sell it.
What goes on the invoice
Show the full selling price and no separate VAT figure. Add a margin scheme reference such as “Margin scheme — second-hand goods”. Our free dealer invoice template adds this wording for you when you pick “Margin scheme”.
The records HMRC wants: a stock book
To use the margin scheme you need a record of every car, which HMRC calls a stock book. For each car it should show:
- a stock number, the purchase date and who you bought it from
- the registration, make and model
- the purchase price and the purchase invoice
- the sale date, who bought it and the selling price
- the margin and the VAT due on it
Keep the purchase and sales invoices with it. Records must be kept for at least six years.
A stock book that does the sums.
StockBook keeps every car's purchase price, costs and sale in one place, and works out the profit on each car as you go. Put the margin scheme wording in your invoice terms once and it prints on every sale.
Questions dealers ask
- How is VAT worked out under the margin scheme?
- Take the selling price, subtract what you paid for the car, and the difference is your margin. VAT is 1/6 of that margin at the 20% rate. Buy at £6,000, sell at £7,800, and the margin is £1,800, so £300 goes to HMRC.
- Can I take repair and prep costs off the margin?
- No. The margin is just selling price minus purchase price. Repairs, parts, valeting and transport don't reduce it. If those costs came with a VAT invoice, reclaim that VAT on your return in the normal way instead.
- What happens if I sell a car at a loss?
- No VAT is due on that car, but the loss can't be set against the margin on other cars. Each car is worked out on its own, and global accounting isn't allowed for cars.
- Should a margin scheme invoice show VAT?
- No. The invoice must not show VAT as a separate figure, otherwise the buyer may try to reclaim it. Show the full price and a margin scheme reference such as "Margin scheme — second-hand goods".
- Does the VAT registration threshold count my margin or my sales?
- Your sales. The £90,000 threshold is measured on your full selling prices, not your margins, so a dealer turning over a few cars a month can reach it quickly.
- Can I use the margin scheme on an ex-fleet or ex-lease car?
- Only if you bought it without VAT shown on the invoice. If the seller charged you VAT, the car is outside the margin scheme: you reclaim the VAT you paid and charge 20% on the full selling price.
This guide is a record-keeping aid, not tax advice. It covers the standard 20% rate and the rules in HMRC's VAT Notice 718. Check anything you're unsure about with HMRC or your accountant.