What the scheme is
HMRC: “You can use a margin scheme to account for VAT on the difference between the price you pay for a second-hand vehicle and the price you sell it for, instead of the full selling price of each vehicle.” A vehicle is second-hand “when it has been driven on the road for business or pleasure purposes or is suitable for further use”. (GOV.UK, VAT Notice 718/1)
Using a margin scheme is a choice. GOV.UK: “You can start using a margin scheme at any time by keeping the correct records, and then reporting it on your VAT return. You do not have to register.” A business that doesn't meet all the scheme's requirements pays VAT on the full selling price. (GOV.UK, VAT margin schemes)
VAT registration itself is compulsory when total taxable turnover for the last 12 months goes over £90,000, or is expected to go over £90,000 in the next 30 days. (GOV.UK, Register for VAT)
Which cars can go in the scheme
A car can be sold under the scheme when it was bought from:
- a private individual;
- a business not registered for VAT;
- a dealer or business that couldn't reclaim the VAT on its purchase;
- a VAT-registered dealer (under the scheme);
- Motability, on an invoice showing VAT charged at the zero rate.
Source: GOV.UK, Buying second-hand vehicles using a VAT margin scheme
The scheme can't be used for:
- new vehicles;
- vehicles imported into the UK, including ones collected on your behalf;
- any vehicle bought on an invoice which shows VAT separately;
- category A and B write-offs, or any vehicle subject to the End of Life Directive;
- vehicles already sold under the normal VAT rules;
- vehicles on which the buyer reclaimed, or was entitled to reclaim, the VAT;
- some vehicles moving between Northern Ireland and EU countries (listed on GOV.UK).
Source: GOV.UK, Using the VAT margin scheme for second-hand vehicles
“Qualifying” cars
HMRC's motoring notice defines a qualifying car: “a car that's not been subject to the full input tax block. This means that your business or any previous owner has recovered the input tax on the purchase in full. These cars will be sold on a normal tax invoice, with VAT charged on the full selling price.” (HMRC, VAT Notice 700/64, section 2.3) A car bought on an invoice that shows VAT separately is one of the vehicles the margin scheme excludes (above).
Working out the VAT
GOV.UK's steps:
- work out the purchase price and the selling price;
- take the purchase price away from the selling price — the gross margin;
- multiply the gross margin by 1/6.
“The VAT is due on the difference between what you paid for the vehicle and what you sold it for, not the overall profit you have made on it.” (GOV.UK) GOV.UK's own example, for any second-hand goods: bought for £1,500, sold for £2,000 — VAT at one-sixth of the £500 difference is £83.33. (GOV.UK, VAT margin schemes)
| Price | Includes | Leaves out |
|---|---|---|
| Purchase price | Everything paid for the vehicle | The cost of bringing it to sale, repairs, refurbishment, accessories, business overheads |
| Selling price | Everything received for the vehicle, from the buyer or a third party — including incidental expenses directly linked to the sale (GOV.UK's example: an MOT paid for to make it saleable) and accessories fitted before the sale | Disbursements, which are accounted for separately, outside the scheme |
Source: GOV.UK, Using the VAT margin scheme for second-hand vehicles
Repairs, parts, accessories and overheads aren't part of the margin; the VAT on them is reclaimed on the VAT return in the normal way. (GOV.UK, VAT margin schemes)
Part-exchange, warranties, MOT and finance
- Part-exchange: the selling price of the car sold isn't reduced by the value of the car taken in. The part-exchanged car's purchase price is the value agreed with the customer, as on the invoice — even when the trader over-allows. A low-value part-exchange sold for parts or scrap can't go through the scheme.
- Warranty charged separately: standard-rated, outside the scheme, and not in the selling price. A “free” warranty is part of the selling price, and the invoice shows no separate charge for it.
- Sold with an MOT: a single supply — the full selling price, MOT included, goes in the stock book.
- Hire purchase: the trader is treated as selling the car to the finance company, and the values on the finance paperwork must match the stock book — part-exchange and cash deposit included.
Sources: GOV.UK, Other products and circumstances and Selling second-hand vehicles using a VAT margin scheme
Buying at auction, from insurers, and rebuilt cars
- Auctions: whether a car can be sold on under the scheme should be in the auctioneer's catalogue. If the auctioneer charges VAT separately on the hammer price, the scheme can't be used for the onward sale. The purchase price is the hammer price plus charges for services such as the buyer's premium (without VAT shown separately); the indemnity fee isn't included.
- From an insurer or finance house: no VAT is charged if the car is sold on in exactly the same state and the insurer or finance house got it from someone who wouldn't have charged VAT, such as a private individual. It can then be resold under the scheme if eligible.
- Rebuilt cars: one built from used vehicles bought under the scheme can be sold under it if it doesn't need re-registering. If DVLA gives it a new registration number, the scheme can't be used.
- Cash: selling a car for the equivalent of 10,000 euros or more in cash means registering with HMRC as a high value dealer.
Sources: GOV.UK, Buying second-hand vehicles and Selling second-hand vehicles using a VAT margin scheme
Invoices and the stock book
The scheme needs normal VAT records, plus “a stockbook that tracks each item sold under the margin scheme individually” and copies of the purchase and sales invoices. (GOV.UK)
| Stock book: purchases | Stock book: sales |
|---|---|
| Stock number in numerical sequence | — |
| Date of purchase | Date of sale |
| Purchase invoice number (unless you made out the purchase invoice yourself) | Sales invoice number |
| Purchase price | Selling price, or method of disposal |
| Name of seller | Name of buyer |
| Description of the item | — |
| — | Margin on sale (sales price less purchase price) |
| — | VAT due (16.67% or one-sixth) |
Source: GOV.UK, VAT margin schemes: keeping records
- Buying: the invoice from the seller has the date, the seller's name and address, the buyer's name and address, an invoice number (unless the buyer made out the invoice), a description and the total price — with no other costs added. From another VAT-registered business it also carries that business's stock book number and the words “margin scheme - second hand goods”.
- Selling: the invoice to the buyer has the date, the seller's name, address and VAT registration number, the buyer's name and address, the stock book number, an invoice number, a description, the total price — “you must not show VAT separately” — and the words “margin scheme - second hand goods”.
- How long: VAT records are kept for 6 years, and stock bought more than 6 years ago is kept on record until it is sold.
- VAT return: the VAT due on the margins goes in box 1, the full selling prices (less that VAT) in box 6 and the full purchase prices in box 7; margin scheme purchases and sales don't go in boxes 8 and 9.
Sources: GOV.UK, VAT margin schemes: keeping records and VAT margin schemes
The margin scheme on Motorwatchr
MotorMargin, the margin calculator on every car page, shows margin-scheme VAT as 1/6 of (sell − buy) for a VAT-registered dealer, with GOV.UK named beside it. When the sell price is at or below the buy price it shows no VAT figure, and for an imported car or a Cat A or Cat B write-off it shows GOV.UK's rule instead of a figure. More for new traders in Car flipping in the UK.