A part exchange is two transactions recorded together: the purchase of the new vehicle at its full price and the sale of the old one for the part exchange allowance. Take the old vehicle’s cost and depreciation out of the books, compare the allowance with its carrying amount to find the gain or loss, and run everything, including any finance the dealer settles, through a dealer control account so it balances to the cash actually paid or borrowed.
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Why should a part exchange be split into a sale and a purchase?
The dealer’s invoice usually shows one net figure, but the accounts need both sides. FRS 102 paragraph 17.27 requires an item of property, plant and equipment to be derecognised on disposal, and paragraph 17.30 measures the gain or loss as the difference between the net disposal proceeds and the carrying amount. In a part exchange, the allowance given for the old vehicle is the disposal proceeds. Paragraph 17.28 says the gain or loss goes to profit or loss and must not be classified as revenue.
VAT treats it the same way. VAT Notice 700 paragraph 8.7 says that where goods are received in full or part payment, two separate supplies take place: one from the dealer to you and one from you to the dealer. Netting the two figures hides output tax you may owe and understates the cost of the new vehicle. The general disposal entries are set out in accounting for the disposal of fixed assets; this page deals with the extra pieces that come with vehicles.
What value goes on the new vehicle?
Use the new vehicle’s cash price, excluding any VAT you can reclaim. FRS 102 paragraph 17.14 deals with assets acquired in exchange for a non monetary asset, or for a mix of cash and non monetary assets, and requires the acquired asset to be measured at fair value unless the exchange lacks commercial substance or neither fair value can be measured reliably. In practice the list price less normal discount is the fair value.
Watch for inflated allowances. A dealer sometimes offers more than the old vehicle is worth while giving less discount on the new one. Both figures then overstate value: the gain on the old vehicle looks larger and the new vehicle’s cost looks higher. If the allowance is clearly above market value, reduce both the proceeds and the new vehicle’s cost to realistic figures so the asset is recorded at fair value.
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How does VAT affect the entries?
It depends on whether input tax was recovered when the old vehicle was bought.
- A car on which VAT was blocked. VAT Notice 700/64 section 7.2 says that if you were charged VAT on a car but could not recover any of it, the sale is exempt and you do not charge VAT on the allowance. The full allowance is the disposal proceeds.
- A van or other commercial vehicle on which VAT was recovered. Section 7.4 says you must account for output tax on the full selling price. Notice 700 paragraph 7.4 says the value of a part exchange is its monetary equivalent, worked out by reference to the price excluding VAT. The VAT goes to output tax, not to the disposal account.
- A vehicle bought without VAT, for example from a private seller. Section 7.4 says the margin scheme can be used on the sale of such a commercial vehicle, and section 7.3 covers cars.
On the new vehicle, reclaim input tax only where the normal rules allow; for cars that is rare. See VAT on vans and pickups for where the line is drawn.
What happens to finance still owed on the old vehicle?
If the old vehicle is on hire purchase, the finance company still owns it. The dealer normally pays the settlement figure directly and adds it to the amount you owe for the new vehicle. In your books, the hire purchase liability is cleared against the dealer account, not against the disposal account. The finance does not change the gain or loss; it only changes how much cash or new borrowing is needed.
Compare the settlement figure with the liability in your books. Any difference is usually unexpired interest that was rebated or early settlement charges, and belongs in interest payable. If the new vehicle is also on finance, the amount borrowed is a new liability, set up as described in accounting for hire purchase agreements.
What does a full example look like?
Illustration only. A VAT registered company part exchanges a van. The old van cost £30,000 net of VAT, which was recovered, and has accumulated depreciation of £18,000, so its carrying amount is £12,000. The finance company is owed £4,000. The new van costs £40,000 plus £8,000 VAT. The dealer allows £15,000 plus £3,000 VAT for the old van and settles the £4,000. The company pays a £6,000 deposit and finances the remaining £28,000.
| Step | Debit | Credit | £ |
|---|---|---|---|
| New van cost | Motor vehicles cost | Dealer account | 40,000 |
| VAT on new van | Input VAT | Dealer account | 8,000 |
| Remove old van cost | Disposal account | Motor vehicles cost | 30,000 |
| Remove old van depreciation | Accumulated depreciation | Disposal account | 18,000 |
| Allowance for old van | Dealer account | Disposal account | 15,000 |
| VAT on allowance | Dealer account | Output VAT | 3,000 |
| Old finance settled by dealer | Old hire purchase liability | Dealer account | 4,000 |
| Deposit paid | Dealer account | Bank | 6,000 |
| New finance drawn | Dealer account | New hire purchase liability | 28,000 |
The dealer account clears: credits of £40,000, £8,000 and £4,000 equal debits of £15,000, £3,000, £6,000 and £28,000. The disposal account shows £30,000 cost less £18,000 depreciation less £15,000 proceeds, a credit balance of £3,000, which is the profit on disposal taken to the profit and loss account. Had the van been a car with VAT blocked, there would be no output tax and no input tax, and the figures would be gross throughout.
How is the old vehicle treated for capital allowances?
A part exchange is a disposal. HMRC’s guidance on selling an asset lists swapping it for something else as a disposal and says the value is usually what you sold it for. Section 61 of the Capital Allowances Act 2001 sets the disposal value on a sale as the net proceeds, so the allowance, excluding any output VAT, is deducted from the pool the vehicle is in. If the old van had full annual investment allowance and the pool has nothing left to absorb it, the result is a balancing charge.
Where the old vehicle was on hire purchase, section 67 treated the company as owner while it was entitled to the benefit of the contract. HMRC’s Capital Allowances Manual at CA23330 explains that a person treated as owner who stops being entitled to the contract without becoming the owner must bring a disposal value into account. The new vehicle’s cost is fresh expenditure: cars cannot take the annual investment allowance (section 38B, general exclusion 2), so they go to a pool according to their emissions. See capital allowances on cars.
What mistakes come up most often?
- Posting only the net payment. The new vehicle is understated and the old one stays on the register.
- Leaving the old vehicle in the fixed asset register. Depreciation then continues on an asset the company no longer owns. Update the fixed asset register on the date the dealer takes it.
- Crediting the settlement figure to the disposal account. It clears a liability; it is not proceeds.
- Missing output VAT on a van. If input tax was recovered on purchase, the allowance carries VAT.
- Charging VAT on a blocked car. That sale is exempt, so no VAT invoice should be raised.
- Using the gain or loss as the capital allowance figure. Tax uses the disposal value against the pool, not the accounting result.
If the replacement is on a personal contract purchase agreement rather than hire purchase, the accounting changes; see accounting for a vehicle bought on PCP finance.
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Related Accountapedia entries
- Share for Share Exchange and Tax
- SDLT on new homes bought with a part exchange
- Recording business loans and interest
- Recording share issues: share capital and share premium
- Bookkeeping for landlords
Related cover: Professional indemnity insurance for accountants and What professional indemnity insurance covers. For the whole practice, see insurance for accountants and fee protection schemes for your clients.
Sources
- Financial Reporting Council: FRS 102 September 2024 tmKYWO6
- GOV.UK: Vat guide notice 700
- GOV.UK: Vat on motoring expenses notice 70064
- GOV.UK: Capital allowances sell asset
- legislation.gov.uk: Act 2001 c. 2, section 61
- legislation.gov.uk: Act 2001 c. 2, section 67
- GOV.UK: Manual page CA23330
- legislation.gov.uk: Act 2001 c. 2, section 38B
Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.