If your garage or dealership sells used vehicles and you're VAT-registered, the default position is brutal: VAT is due on the full selling price of every car. The VAT margin scheme changes that — you account for VAT only on the difference between what you paid and what you sold for. On a car bought for £6,000 and sold for £7,500, that's VAT of £250 instead of £1,250. But the scheme is conditional, and HMRC removes it entirely for vehicles that don't qualify or records that don't stack up.
How the Margin Is Taxed
Under the scheme you pay VAT at one-sixth (1/6) of your margin — the VAT fraction of 20%:
| Example | Amount |
|---|---|
| Purchase price | £6,000 |
| Selling price | £7,500 |
| Margin | £1,500 |
| VAT due (1/6 of margin) | £250 |
Key points: the margin is selling price minus purchase price only. You cannot add repair costs, parts, valeting or overheads to the purchase price to shrink the margin — though you can reclaim input VAT on those costs separately in the normal way. If you sell at a loss, the margin is nil, no VAT is due — but you cannot offset a loss on one car against the margin on another (each vehicle is calculated individually; cars are excluded from the Global Accounting variant).
The Conditions: When You Can Use the Scheme
The full rules are in VAT Notice 718/1 — the margin scheme on second-hand cars and other vehicles. The essentials:
- The vehicle must have been bought with no VAT charged to you — typically from a private individual, a non-VAT-registered business, or another dealer who sold it to you under the margin scheme
- You must not have reclaimed input VAT on the purchase
- Your purchase invoice and sales invoice must never show VAT separately — show VAT on a margin scheme sales invoice and the scheme is lost for that vehicle, with VAT due on the full price
- You must keep the required records (below) for every vehicle
When You Cannot Use It
- You bought the vehicle on an invoice showing VAT — e.g. a "qualifying car" from a leasing company, ex-fleet or dealer stock sold outside the scheme. VAT is then due on the full selling price (you reclaim the input VAT and charge output VAT as normal)
- New vehicles, and vehicles imported from outside the UK in most circumstances
- Anything where your paperwork can't demonstrate eligibility — at inspection, no records means no scheme
The Records HMRC Will Ask For
Margin scheme record-keeping is where dealers fail inspections. For every vehicle you must keep:
- A stock book with a unique stock number per vehicle, purchase date, purchase price, seller details, selling date, selling price, margin and VAT due
- A purchase invoice — if you buy from a private individual, you prepare it yourself and have the seller sign it
- A sales invoice with the stock number, with no VAT shown
Records must be kept for six years. An incomplete stock book is the single most common reason HMRC assesses dealers for VAT on full selling prices, so treat it as seriously as the cars themselves. General guidance on all margin schemes is at gov.uk/vat-margin-schemes.
Mixing Margin and Normal Sales
You can use the margin scheme alongside normal VAT accounting — many garages do. Trade-ins bought from the public go through the margin scheme; ex-lease "qualifying cars" bought with VAT go through normal accounting; repairs, parts and MOTs follow their own rules. The discipline is keeping each stream clearly separated in your bookkeeping.
Worth Professional Help
The margin scheme saves real money but punishes sloppy paperwork. At SMD Accountancy we set up stock books, configure your bookkeeping software for mixed margin/standard sales, and prepare VAT returns for garages and dealers. Book a free call if you want your used-vehicle VAT put on solid ground.