VAT margin scheme for used car dealers

A VAT registered used car dealer can account for VAT on the margin between the price paid for a second hand vehicle and the price it sells for, at one sixth of that margin, instead of on the full selling price. The car must have been bought without VAT being shown or reclaimable, the dealer needs a qualifying purchase invoice and a stock book entry, and the sales invoice must not show VAT. New, imported and some written off vehicles are excluded.

What law gives used car dealers the margin scheme?

Cars have their own legal basis, separate from other second hand goods. HMRC’s manual at VATMARG08050 cites article 8 of the VAT (Cars) Order 1992 (SI 1992/3122), which lets a dealer opt to account for VAT on the profit margin where it took possession of the car through a supply on which no VAT was chargeable, a supply already taxed on the margin, or a transaction that is not a supply, such as a transfer of a going concern. VATMARG08100 confirms the scheme can also be used for commercial vehicles that are not cars, under the general margin scheme rules. The general paperwork principles are covered in our page on the margin scheme for second hand goods; this page deals with what is specific to vehicles.

Which vehicles can be sold under the scheme?

HMRC’s guidance treats a vehicle as second hand when it has been driven on the road for business or pleasure or is suitable for further use. You cannot use the scheme for:

• new vehicles
• vehicles imported into the UK, including those collected on your behalf
• any vehicle bought on an invoice showing VAT separately
• category A and B write offs, or vehicles subject to the End of Life Directive
• vehicles already sold under the normal VAT rules
• vehicles on which you reclaimed, or were entitled to reclaim, VAT, including import VAT

VATMARG08300 explains the import exclusion: imported cars are subject to the normal input tax rules unless they qualify for returned goods relief or are classed as collectors’ pieces. Where a business imports a car and cannot reclaim the import VAT, its onward sale is exempt, and a dealer buying that car can then use the margin scheme. The same applies more widely: since 1 March 2000, the sale of a car on which the seller’s input tax was blocked is exempt under Schedule 9, Group 14, of the VAT Act 1994, and the dealer who buys it can margin scheme the resale (VATMARG08050). Our guide to VAT on cars, vans and fuel explains when that block applies.

Who can a dealer buy from, and what purchase evidence is needed?

HMRC’s buying guidance lists eligible sources: private individuals, businesses not registered for VAT, dealers or businesses that could not reclaim input VAT on the car, VAT registered dealers selling under the margin scheme, and Motability where the invoice shows VAT at the zero rate. For every purchase you must get a purchase invoice, enter the details in your stock book and check for any linked insurance products or warranties. The stock book and invoice contents are those required for all margin scheme goods, including a stock number, the seller’s name, the purchase price and the item description. If you buy from another VAT registered dealer, the invoice must show its stock book number and that the vehicle was sold under the margin scheme.

Auctions, online sales, insurers and finance houses

At auction, check the catalogue to confirm the vehicle is eligible. If the auctioneer charges VAT separately on the hammer price, you cannot use the margin scheme or global accounting for the resale. Your purchase price is the hammer price plus charges for services such as the buyer’s premium, provided those charges do not show VAT separately. Any indemnity fee is not included. On online auction sites you must find out whether the seller is VAT registered and whether the vehicle is eligible.

A vehicle bought from an insurer after a claim, or from a finance house after repossession, is not charged with VAT if it is sold to you in the same state and was obtained from someone who would not have charged VAT, such as a private individual. You can then resell it under the scheme if it is otherwise eligible.

What goes into the selling price?

The margin is the selling price less the purchase price, and the VAT is one sixth of it. HMRC’s guidance says the purchase price excludes the cost of bringing the vehicle to sale, repairs, refurbishment, accessories and overheads. The selling price is everything you receive from the buyer or a third party, including incidental costs linked to the sale and accessories fitted before sale. Disbursements are left out and dealt with separately. Vehicle specific points include:

• MOT: a car sold with an MOT is a single supply, so the full price including the MOT goes in the stock book (VATMARG08250).
• Road tax: a car that is taxed before the deal is a single supply; tax obtained for the customer after the sale is agreed can be a separate disbursement if the conditions are met (VATMARG08200).
• Part exchange: the selling price is not reduced by the value of the car taken in part exchange, and the part exchange vehicle becomes a purchase at the agreed value.
• Warranties: a separately charged warranty is standard rated outside the scheme; a “free” warranty is part of the vehicle price.
• Linked insurance: products such as GAP or mechanical breakdown cover are exempt and excluded from the selling price only if the customer is free to buy the car without them and the premium and any fee or commission are disclosed. See our page on insurance intermediary services.
• Hire purchase: where you arrange finance, you are treated as selling to the finance company, and the values on the finance documents must match your stock book.

What does a typical deal look like?

Illustration only. A dealer buys a car from a private seller for £8,000 and spends £400 plus VAT on new tyres. It sells the car with a fresh MOT for £10,400, taking the customer’s old car in part exchange at an agreed £2,000. The margin is £10,400 minus £8,000, which is £2,400, giving VAT of £400. The tyre costs do not reduce the margin; the VAT on them is reclaimed as input tax. The part exchange car is entered in the stock book at £2,000 as a new purchase.

What records are specific to vehicles?

You keep the normal VAT records plus a stock book tracking each vehicle and copies of purchase and sales invoices. For vehicles held on sale or return, the stock book must show the transfer date, the address of the dealer or person transferring the vehicle and the date of sale or return. If a vehicle is moved to another dealer’s premises on sale or return, note that in your stock record. If you sell a vehicle for a third party but invoice in your own name, you are acting as an agent for VAT purposes and must account for output tax on the sale; our guide to being an agent or principal for VAT explains the distinction.

Which unusual sales fall outside the scheme?

• A vehicle built from used parts that the DVLA gives a new registration number cannot use the scheme; a rebuilt vehicle that keeps its registration can.
• A vehicle adapted for a disabled person can be sold outside the scheme by closing its stock book entry and noting the reason.
• A vehicle received as a gift cannot be sold under the scheme. If you give away an eligible vehicle, no VAT is due but you must record the recipient’s details.
• A sole proprietor can sell an eligible vehicle transferred into the business from private ownership under the scheme, if there is evidence of the original purchase price.
• A low value part exchange car broken up for usable parts cannot use the margin scheme; VAT is due on the full price of each part.

Accepting cash does not change the calculation, but selling a vehicle for the equivalent of 10,000 euros or more in cash means registering with HMRC as a high value dealer.

What mistakes cause problems on an HMRC visit?

The recurring issues are adding preparation costs to the purchase price, reducing the selling price by an overallowance on a part exchange, finance documents that show a different price from the stock book, and margin scheming cars bought on an invoice that shows VAT separately. Because HMRC can charge VAT on the full selling price where records do not meet the rules, an incomplete stock book is the most expensive error a dealer can make during an HMRC VAT compliance check.

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Related Accountapedia entries

• The VAT auctioneers’ scheme
• Do I charge VAT when selling business assets
• Global accounting for second hand goods
• VAT on leasing a car and the 50% block
• Can a business reclaim VAT on a car

Sources

• GOV.UK: www.gov.uk
• GOV.UK: www.gov.uk
• GOV.UK: Using the vat margin scheme for second hand vehicles
• GOV.UK: www.gov.uk
• GOV.UK: Buying second hand vehicles using a vat margin scheme
• GOV.UK: Keeping records
• GOV.UK: www.gov.uk
• GOV.UK: www.gov.uk
• GOV.UK: Other products and circumstances affecting the second hand vehicles va
• GOV.UK: Selling second hand vehicles using a vat margin scheme

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.