VAT Margin Scheme for Used Cars: A UK Dealer's Guide

Last updated 23 September 2026.

If you sell used cars, the VAT margin scheme is the single biggest thing that decides how much VAT you pay. Get it right and you pay VAT only on the margin you make on each car, not the full price. Get it wrong and HMRC can ask for VAT on the full selling price. This guide explains how the margin scheme works for used cars, who can use it, how to work out the VAT, and the invoices and records HMRC expects to see.

This is general guidance based on HMRC’s published rules, not tax advice. Every business is different, so check anything you are unsure about with your accountant.

To work out the VAT on a car, or on a whole month of sales, use our free VAT margin scheme calculator.

Try it now: Use our free vehicle profit calculator to compare the VAT due under the margin scheme and standard VAT for any deal.

What is the VAT margin scheme?

The VAT margin scheme is an optional HMRC scheme for second-hand goods. Instead of charging VAT on the full selling price, a VAT-registered dealer pays VAT on the difference between the price they paid for an item and the price they sold it for. For used cars, vans and motorcycles, that difference is your margin.

The scheme exists because a used car bought from a private seller has already had VAT paid on it once, when it was new. Charging VAT on the full price again every time it changes hands would tax the same car over and over.

There are three HMRC margin schemes: the margin scheme for second-hand goods, the global accounting scheme and the auctioneers’ scheme. Car dealers use the first one. HMRC sets out the vehicle rules in its guidance on using the VAT margin scheme for second-hand vehicles, with separate pages on buying, selling and part exchanges, warranties and other circumstances. These pages replaced VAT Notice 718/1, which HMRC withdrew in December 2021.

Using the margin scheme is optional, but if you do use it you must follow all of its rules. If you cannot, you have to charge VAT on the full selling price.

Who can use the VAT margin scheme?

You can use the margin scheme if you are registered for VAT and you sell eligible second-hand vehicles. If you are not VAT registered you do not charge VAT at all, so the scheme does not apply to you until you register. You must register once your taxable turnover (your total sales, not your margin) goes over £90,000 in the last 12 months, or you expect it to go over £90,000 in the next 30 days. If you are just starting out, our guide to starting a car sales business covers registering and setting up.

Which vehicles are eligible?

Two things must both be true: the vehicle must be second-hand, and you must have bought it in eligible circumstances, which in practice means no VAT was charged to you on it.

A vehicle is second-hand when it has been driven on the road for business or pleasure and is suitable for further use as it is or after repair. You can use the margin scheme for second-hand vehicles you bought from:

• private individuals
• businesses that are not registered for VAT
• dealers or businesses that could not reclaim the VAT when they bought the vehicle (most businesses cannot reclaim VAT on a car, so many ex-company cars are eligible)
• VAT-registered dealers who sold it to you under the margin scheme (their invoice should say so)
• Motability, where your invoice shows VAT charged at the zero rate

You cannot use the margin scheme for:

• new vehicles (registering a car and delivery mileage do not make it “used”)
• vehicles imported into the UK, including vehicles collected on your behalf
• any vehicle bought on an invoice that shows VAT separately, even if you do not reclaim that VAT
• vehicles where you reclaimed, or were entitled to reclaim, the VAT
• Category A and B write-offs, or vehicles subject to the End of Life Directive
• vehicles you have already sold under the normal VAT rules

You cannot make a vehicle eligible by choosing not to reclaim the VAT on it. If VAT was shown on the purchase invoice, it is out of the scheme.

How to calculate VAT on the margin scheme

HMRC’s calculation is three steps:

1. Work out the purchase price and the selling price.
2. Take the purchase price away from the selling price. This is the gross margin.
3. Multiply the gross margin by 1/6.

The VAT fraction is 1/6 rather than 20% because your margin already includes the VAT. At the 20% standard rate, one-sixth of a VAT-inclusive amount is the VAT. So a £1,200 margin is £1,000 plus £200 VAT, and £1,200 × 1/6 = £200.

Worked examples

In the second example the £600 of preparation is not added to the purchase price, so VAT is worked out on the full £2,045 margin, even though your real profit is lower. You can still reclaim any VAT charged on the preparation work in the usual way.

In the third example no VAT is due, and you record the VAT as nil in your stock book. You cannot set that £400 loss against the VAT due on the other two cars. Every car is calculated on its own.

The margin scheme taxes the difference between what you paid for the vehicle and what you sold it for, not the overall profit you made on it. Our vehicle profit calculator shows both figures side by side.

What counts in the purchase price

Your purchase price is everything you had to pay for the vehicle. At auction, it is the hammer price plus the auctioneer’s charges for services such as the buyer’s premium, as long as VAT is not shown separately on those charges.

Costs you cannot add to the purchase price

HMRC is clear that the purchase price does not include the cost of bringing the vehicle to sale. You cannot add:

• repairs, parts or refurbishment
• valeting, smart repairs or other preparation
• accessories you fit
• business overheads
• the auction indemnity fee
• any auction charges where VAT is shown separately (reclaim that VAT in the usual way instead)

If you surrender a car’s unexpired road tax for a refund, you do not reduce the purchase price by the refund.

What counts in the selling price

Your selling price is everything you receive for the vehicle, whether from the buyer or a third party. That includes an MOT you had done to make the car saleable, accessories fitted before the sale, and any warranty or insurance product you include “free” in the price. You do not deduct these from the selling price. Genuine disbursements, and optional extras such as insurance the buyer pays for separately, are dealt with outside the scheme.

Margin scheme vs standard VAT

Some vehicles have to be sold with VAT on the full price. Knowing which is which, car by car, is the most important part of getting VAT right.

Qualifying cars

A qualifying car is one where your business or a previous owner recovered the VAT in full when it was bought. Leasing and rental companies normally reclaim the VAT on their cars, so ex-lease and ex-rental cars are often qualifying cars, and leasing companies must say on their invoices whether a car is qualifying. Qualifying cars are sold on a normal VAT invoice with VAT on the full selling price, whether the buyer is a business or a private customer. They cannot go through the margin scheme. Our guide to VAT qualifying cars explains how to tell if a car qualifies and how to price it.

Once a qualifying car has been sold with VAT to someone who cannot reclaim it, such as a private buyer, it can come back into the trade as a margin scheme car. So if that customer later part exchanges it with you, you can sell it under the margin scheme.

Most dealers hold both types of stock at once, and franchise dealers in particular see a lot of qualifying cars. Record the VAT treatment against each vehicle when you buy it, not when you come to sell it.

Choosing standard VAT for a business buyer

Because the margin scheme is optional, you can sell an eligible vehicle under the normal VAT rules instead. This can suit a VAT-registered buyer who is entitled to reclaim the VAT. For example, on a van bought from a private seller for £7,000:

• Margin scheme at £10,000: you pay £500 VAT (£3,000 × 1/6). The buyer pays £10,000 and cannot reclaim anything.
• Standard VAT at £10,000 plus VAT: the buyer pays £12,000 and you pay £2,000 VAT. If the buyer can reclaim the £2,000, their net cost is £10,000 and you keep £10,000 instead of £9,500.

This mostly applies to commercial vehicles. Most businesses cannot reclaim VAT on buying a car unless it is used only for business, such as a taxi, driving school car or self-drive hire car. So for cars, the margin scheme is almost always better. Once you have sold a vehicle under the normal VAT rules, you cannot go back and apply the margin scheme to that sale.

VAT on used vans and commercial vehicles

The margin scheme works the same way for vans, pick-ups and other commercial vehicles, but the VAT history is different. VAT-registered businesses can usually reclaim the VAT on a van. So a van bought from a VAT-registered business will normally come with VAT on the invoice, and you must charge VAT on the full selling price when you sell it. A van bought from a private individual or a business that is not VAT registered can go through the margin scheme. See VAT on used vans and commercial vehicles for worked examples.

When you take a commercial vehicle in part exchange, check whether your customer is VAT registered. If they are, they must give you a sales invoice.

Part exchanges and the margin scheme

Part exchanges catch out a lot of dealers. There are two rules:

• The car you sell: record the full selling price in your stock book. Do not reduce it by the part-exchange allowance.
• The car you take in: its margin scheme purchase price is the part-exchange value you agreed with the customer and shown on the invoice, even if you over-allowed and its real trade value is lower.

For example, you sell a car for £12,000 that you bought for £9,000, and allow £3,000 for the customer’s car, so they pay £9,000. The selling price in your stock book is £12,000, the margin is £3,000 and the VAT due is £500. The part exchange goes into your stock book with a purchase price of £3,000, even if it is only worth £2,500 to the trade.

If the part exchange comes from a private customer or a business that is not VAT registered, you can include its details on your sales invoice, as long as the invoice meets all the margin scheme invoice rules below. If you take a low-value car in part exchange and break it for parts or scrap, those sales cannot go through the margin scheme. Our part exchange guide works through an overallowance example.

Margin scheme invoice requirements

Invoices under the margin scheme have strict rules, and these sections of HMRC’s notice have legal force.

Sales invoices

Every margin scheme sales invoice must show:

• your name, address and VAT registration number
• the buyer’s name and address
• a reference that links it to your stock book, for example the stock number
• the invoice number and date
• a description of the vehicle, including its registration number
• the total price, without VAT shown separately
• the words “margin scheme - second hand goods”

Showing VAT on a margin scheme invoice is one of the most common mistakes. If a VAT amount appears, the buyer may try to reclaim it and HMRC can ask you for VAT on the full price. If you include more than one vehicle on an invoice, give each one its own price.

Purchase invoices

When you buy from a private individual or a business that is not VAT registered, you must make out the purchase invoice yourself. It needs the seller’s name and address, your name and address, the stock book reference, the date, a description of the vehicle including its registration, and the total price with no other costs added. When you buy from a VAT-registered business, their invoice must say “margin scheme - second hand goods”. If it shows VAT, the vehicle is not eligible.

Our car sales invoicing handles margin scheme and standard VAT vehicles for you. If you only need the odd invoice, try our free car sales invoice generator.

Selling on finance

When you arrange hire purchase for a customer, you are treated as selling the car to the finance company. VAT must not be shown separately on the HP agreement or on the customer’s invoice, and the figures you give the finance company, including any part exchange and deposit, must match the figures in your own books.

Stock book and record keeping

On top of your normal VAT records, the margin scheme needs a stock book that tracks every vehicle individually, plus copies of all purchase and sales invoices. For each vehicle your stock book must show:

• a stock number, in numerical sequence
• the date of purchase and the purchase invoice number
• the purchase price and the seller’s name
• the registration number and a description (for example make and model)
• the date of sale and the sales invoice number
• the selling price, or how you disposed of it
• the buyer’s name
• the margin (selling price less purchase price)
• the VAT due (margin × 1/6), or “nil” if you sold at a loss or break even

Keep your records for at least six years. This matters: if HMRC cannot check your margins from your records, VAT becomes due on the full selling price of the vehicles, even if they were otherwise eligible. Our guide to dealer invoice management covers keeping purchase and sales invoices in order.

Your VAT return

Margin scheme sales go on your VAT return like this:

• Box 1: the VAT due on your margins for vehicles sold in the period
• Box 6: the full selling price of margin scheme vehicles sold, less the VAT due on the margin
• Box 7: the full purchase price of margin scheme vehicles bought

You do not need to include margin scheme purchases or sales in boxes 8 and 9.

Global accounting is not available for cars

Global accounting is a simpler version of the margin scheme where you pay VAT on total sales less total purchases each VAT period, so losses on one item do offset profits on another. It is only for items that cost £500 or less, and it cannot be used for motor vehicles, including motorcycles, or for aircraft, boats and outboard motors, caravans and motor caravans. The one exception for dealers is a vehicle that is broken up for scrap: the parts can then go through global accounting.

Northern Ireland and imported vehicles

Vehicles imported into the UK cannot be sold under the margin scheme, and neither can vehicles where you paid import VAT. The one difference in Northern Ireland is that dealers there can also use the scheme for used vehicles bought from VAT-registered dealers in EU countries, if the EU dealer sold them under a margin scheme. If you import or trade across the Irish Sea, speak to your accountant before you buy.

Common VAT margin scheme mistakes

• Showing VAT on a margin scheme invoice. The total price must not show VAT separately.
• Putting a qualifying car or VAT-invoiced van through the margin scheme. Check every purchase invoice for VAT before the vehicle goes into stock.
• Adding preparation costs to the purchase price. Repairs, valeting, parts and the auction indemnity fee stay out of the margin calculation.
• Netting off the part exchange. Your stock book selling price is the full price, not the balance the customer paid.
• Offsetting losses. A car sold at a loss has nil VAT, but it does not reduce the VAT on other cars.
• Working out VAT at 20% of the margin. The margin already includes VAT, so use 1/6. On a £3,000 margin that is £500, not £600.
• Gaps in the stock book. Missing purchase invoices or unrecorded sellers can cost you the scheme on those vehicles.
• Large cash sales. If you accept £10,000 or more in cash for a vehicle, you must register with HMRC as a high value dealer.

How Haswent helps with the VAT margin scheme

Keeping all of this straight across a busy forecourt is much easier in a dealer management system than in a spreadsheet. With Haswent you can:

• Set the VAT treatment for each vehicle. Mark stock as margin scheme or standard VAT, and see the VAT margin or VAT due on every car as you price it.
• Create purchase and sales invoices. Raise branded invoices for customers and finance companies, including part exchanges.
• Track costs against each car. Record preparation and other costs so you can see real profit alongside the margin scheme figures.
• Run a VAT margin report. See every margin scheme vehicle with its purchase and sales invoices, buyer and seller, and VAT margin.
• See your monthly profit and loss. Understand what each car and each month really made you.

If you use Xero, the Xero integration sends paid sales invoices, payments and part exchange bills to Xero after you check them.

Try our free vehicle profit calculator to see the margin scheme and standard VAT side by side, then contact us to see how Haswent can support your dealership.

HMRC sources

• Buying second-hand vehicles using a VAT margin scheme
• Selling second-hand vehicles using a VAT margin scheme
• Other products and circumstances affecting the second-hand vehicles VAT margin scheme
• Using the VAT margin scheme for second-hand vehicles
• Motoring expenses (VAT Notice 700/64)

Frequently asked questions