The VAT margin scheme for cars can save second-hand car dealers money.
This guide explains which vehicles can be included in the scheme, how it saves businesses money and how to calculate figures for the VAT return as well as all the records you need to keep.
How Does the VAT Margin Scheme for Cars Work
Second-hand car dealers who need to register for VAT can opt to use an alternative way to calculate their VAT.
The margin scheme for cars entitles second-hand car dealers to pay VAT at 1/6th of the difference between the price they bought the car and sold it for.
Without the margin scheme, the dealer would need to account for VAT at the standard rate of 20% meaning they could potentially lose 20% of their sales price to tax.
When Can Second-Hand Car Dealers Use the Scheme
The second-hand margin scheme is not mandatory. In fact, it can be used for some sales and not others depending on whether a dealer meets the criteria or it makes financial sense to use it.
Car dealers can choose to use it if it suits them, but they must still meet the conditions of the scheme:
1. An Eligible Vehicle Has Been Bought
For the purposes of the VAT scheme, only second-hand vehicles can be included in the scheme.
Second-hand is defined by HMRC as a vehicle which:
- has been driven on the road for business or pleasure purposes;
- is suitable for further use as it is or after repair.
2. The Vehicle Was Bought in Eligible Circumstances
Eligible circumstances means the vehicle was bought from:
- private individuals in the UK or another EC member state
- businesses not registered for VAT
- dealers or businesses who are unable to reclaim the input VAT on the purchase;
- VAT-registered dealers, if sold to you under the Margin Scheme (this should be clear from the invoice you receive);
- VAT-registered dealers in other member states, if supplied to you under a Margin Scheme.
You are not eligible to use the scheme for:
- new vehicles (registration and delivery mileage do not make a vehicle ‘used’ for Margin Scheme purposes);
- any vehicle purchased on an invoice which shows VAT separately – regardless of whether you reclaim the VAT;
- vehicles bought from registered dealers in other member states which have not been supplied under a Margin Scheme;
- imported vehicles.
3. You Are Willing to Keep Certain Records of Vehicles Sold Under the Scheme
Under the second-hand margin scheme, you must keep normal accounting records for VAT purposes but also some additional information:
- Margin scheme stock book
- Margin scheme sales and purchase invoices.
How to Calculate VAT on Second-Hand Car Sales
VAT is calculated on the difference between the selling price and purchase price of a second-hand car.
But there are certain rules that need to be followed to work out each of these figures.
Calculate Selling Price
The selling price is the total amount a car dealer is paid for an eligible vehicle including:
- any expenses paid directly linked to the sale;
- accessories fitted prior to the sale.
Calculate Purchase Price
The purchase price for the purposes of the second-hand scheme may not match the figures used to work out the profit actually made on the sale.
The purchase price is the amount paid for the vehicle, including any incidentals like delivery. But it excludes any money spent repairs or refurbishing the car, including any accessories.
Calculate the Margin
The margin is the difference between the sales price and purchase price. VAT is then calculated on this margin.
A second-hand car dealer buys a car for £2,000 and sells it to a customer for £3,000.
|VAT payable (1/6th x £1,000)||£166.67|
Claiming VAT on Overheads Under the Margin Scheme
You can claim back any VAT paid on overheads using the rules of the Standard VAT Scheme, in full.
The margin scheme only applies to eligible vehicles.
Anita is a Chartered Accountant with over a decade of experience taking self-employed business owners from financially confused to business savvy.
She is the creator of the ‘Go Self Employed’ website, which is her corner on the internet where she makes self-employment less terrifying.