Get to grips with the basics of the VAT margin scheme for second-hand cars, which is a VAT scheme for used cars. Find out what cars can be included, how record-keeping works and what needs to be included when calculating figures for your VAT returns.
Updated 2 July 2021
Table of contents
- 1. The VAT Margin Scheme for Used Cars Explained
- 2. When Can Second-Hand Car Dealers Use the Scheme
- 3. How to Calculate VAT on Second-Hand Car Sales
- 4. Example of the VAT Margin Scheme for Used Cars
- 5. Claiming VAT on Overheads Under the Margin Scheme
1. The VAT Margin Scheme for Used Cars Explained
Second-hand car dealers who need to register for VAT can opt to use an alternative way to calculate their VAT. That’s because dealers usually sell to consumers who cannot claim back the VAT on expenses , so once a dealership registers for VAT they need to either:
- Add VAT at the standard rate of 20% to their sales prices which may make them uncompetitive in the marketplace;
- Take VAT at the standard rate of 20% out from their sales price which will erode margins all because they’ve reached the VAT threshold.
2. When Can Second-Hand Car Dealers Use the Scheme
The second-hand margin scheme is not mandatory or a blanket scheme. What that means is car dealers can choose to use the second-hand scheme for some sales but not others, depending on whether a dealer meets the conditions of the scheme or it makes financial sense to use it. Here are the conditions of the VAT margin scheme for cars:
2.1 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.
2.2 The Vehicle Was Bought in Eligible Circumstances
Eligible circumstances mean 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 car 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.
Car dealers 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.
2.3 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.
3. 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:
3.1 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.
3.2 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.
3.3 Calculate the Margin
The margin is the difference between the sales price and purchase price. VAT is then calculated on this margin.
4. Example of the VAT Margin Scheme for Used Cars
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)
5. Claiming VAT on Overheads Under the Margin Scheme
Car dealers 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 car sales.