The VAT Margin Scheme is a vital tool for UK-based car dealers, particularly those selling used vehicles. By understanding and utilising this scheme effectively, used car dealers can optimise their tax obligations and maintain competitive pricing. This guide explains everything car dealers need to know about the UK VAT Margin Scheme, from eligibility criteria to common pitfalls.

What is the VAT Margin Scheme?

The UK VAT Margin Scheme is a special taxation arrangement that allows dealers to pay VAT only on the profit margin of a sale rather than the full selling price. It is particularly designed for second-hand goods, including used cars, to prevent double taxation and encourage fair pricing in the marketplace.

For car dealers, this means VAT is calculated only on the difference between the purchase price and the selling price of a used vehicle. This scheme offers a significant advantage over the standard VAT scheme, where VAT is charged on the entire selling price.

Who Can Use the VAT Margin Scheme?

The scheme is available to VAT-registered businesses in the UK that deal in used goods, including:

  • Used car dealerships.

  • Traders selling motorhomes or motorcycles.

However, the following conditions must be met:

  • The vehicle must be eligible (e.g. a used car previously owned by a private individual or non-VAT registered entity).

  • The vehicle cannot have had VAT claimed back by the seller.

Vehicles bought from VAT-registered businesses where VAT was charged on the full selling price are not eligible for the scheme.

Key Features of the VAT Margin Scheme

How VAT is Calculated

VAT under this scheme is calculated on the profit margin (i.e. selling price minus purchase price). For example:

  • Purchase Price: £5,000

  • Selling Price: £6,000

  • Profit Margin: £1,000

  • VAT Payable: £166.67 (20% of the £1,000 profit margin)

This ensures VAT is only charged on the added value, making it a cost-effective option for dealers.

Record-Keeping Requirements

Dealers must maintain meticulous records, including:

  • Purchase and sale invoices.

  • Stock books detailing each transaction.

  • Documents proving eligibility for the scheme.

Failure to maintain proper records could result in penalties or disqualification from the scheme.

Advantages and Challenges

Advantages

  • Lower Tax Liability: VAT is calculated only on the profit margin, reducing the overall tax burden.

  • Competitive Pricing: The reduced VAT liability allows dealers to price vehicles more competitively.

Challenges

  • Complexity: The rules and record-keeping requirements can be challenging to navigate.

  • Eligibility Restrictions: Misunderstanding which vehicles qualify can lead to errors.

How to Register for the VAT Margin Scheme

Dealers already registered for VAT can automatically use the Margin Scheme for eligible vehicles. However, they must ensure:

  • Their accounting systems can handle the specific reporting requirements.

  • Their staff are trained to differentiate between standard and margin scheme vehicles.

It is also advisable to consult with an accountant or VAT specialist to ensure compliance.

Practical Examples

Here’s an example to clarify how the VAT Margin Scheme works:

  • A dealer buys a used car for £7,500 from a private seller.

  • The dealer sells the car for £10,000.

  • The profit margin is £2,500.

  • VAT is calculated as 20% of the £2,500 profit margin, amounting to £416.67.

Common Mistakes and How to Avoid Them

Common Errors

  • Charging VAT on the full selling price rather than the margin.

  • Including ineligible vehicles in the scheme.

  • Poor record-keeping, leading to non-compliance.

Solutions

  • Use dedicated software or professional services to manage VAT calculations.

  • Regularly review HMRC guidelines

  • Train staff thoroughly on the scheme’s rules.

Impact on Customers

The VAT Margin Scheme does not directly impact private customers as VAT is included in the dealer’s selling price. However, it enables dealers to offer competitive prices by reducing the VAT burden.

For business buyers, understanding whether VAT can be reclaimed is crucial.

Comparison with other VAT schemes

The VAT Margin Scheme is entirely optional for dealers, and in some cases, it may be more beneficial to charge VAT on top of the full selling price. This is particularly relevant for business-to-business (B2B) sales, where the buyer is VAT-registered.

Charging VAT on top allows the buyer to reclaim the VAT they paid, making the transaction more transparent and tax-efficient for both parties.

For example, consider a vehicle purchased by a dealer for £7,000 and sold for £10,000:

Using the VAT Margin Scheme:

  • The dealer calculates VAT only on the profit margin (£10,000 - £7,000 = £3,000).

  • VAT payable by the dealer to HMRC is £500 (20% of £3,000).

  • The buyer pays £10,000 total, but as no VAT is explicitly charged, they cannot reclaim any VAT.

  • VAT paid by the dealer: £500

  • VAT paid by the buyer: £0

Charging VAT on top (Standard VAT):

  • The dealer sells the vehicle for £10,000 + VAT (£12,000 total).

  • VAT payable by the dealer to HMRC is £2,000 (20% of £10,000).

  • The buyer, being VAT-registered, can reclaim the £2,000 VAT, reducing their net cost to £10,000.

  • VAT paid by the dealer: £2,000

  • VAT paid by the buyer (before reclaim): £2,000 (reclaimed later, so effectively £0).

Impact on Both Parties:

For the Dealer:

  • Under the Margin Scheme, the dealer pays less VAT (£500) but cannot charge VAT on top, which may not appeal to VAT-registered buyers.
  • Charging VAT on top increases the VAT payable (£2,000), but it aligns better with B2B transactions as buyers can reclaim VAT.

For the Buyer:

  • Under the Margin Scheme, the buyer cannot reclaim any VAT and pays £10,000.
  • Charging VAT on top allows the buyer to reclaim the £2,000 VAT, effectively reducing their net cost to £10,000.

In summary, while the VAT Margin Scheme reduces the dealer’s VAT liability, charging VAT on top is often preferable for VAT-registered buyers, making it an attractive option for B2B sales. Dealers should evaluate the preferences of their customer base to decide which approach works best, our dealer management system allows dealers the flexibility to use either the Margin Scheme or Standard VAT

VAT Margin Scheme and Qualifying Cars

When dealing with the VAT Margin Scheme, it’s important for businesses to be mindful of specific rules regarding Qualifying Cars. These are used cars purchased from VAT-registered businesses, such as manufacturers or franchise dealerships. Unlike vehicles bought through the margin scheme, Qualifying Cars must be sold with VAT at the standard rate of 20%, regardless of whether the buyer is VAT-registered or not.

Key Points to Remember:

  • VAT on Qualifying Cars: If a used car is purchased from a VAT-registered business (such as a manufacturer), the vehicle cannot be sold under the margin scheme. Instead, VAT must be applied at the standard 20% rate when the car is sold, whether the buyer is VAT-registered or a private customer.

  • Different Cars in Stock: A business can hold both Margin Cars (sold under the VAT Margin Scheme) and Qualifying Cars in stock. It is crucial to ensure the correct VAT treatment is applied to each car type to comply with VAT regulations. This distinction is particularly important for businesses dealing with both second-hand vehicles and new or used cars purchased from manufacturers or franchise dealerships.

  • The Treatment of Cars Traded Back: When a Qualifying Car is sold to a retail customer and later traded back to the dealer, it loses its status as a Qualifying Car. At that point, it will become a Margin Car when repurchased by the dealer. This shift requires the dealer to apply the VAT Margin Scheme, which involves a different VAT treatment than the initial sale of the Qualifying Car.

  • Franchise Dealers vs. Independent Dealers: Qualifying Cars are commonly seen with franchise dealerships (i.e., those associated with a specific manufacturer or brand). However, even second-hand car dealers can have Qualifying Cars in their inventory, depending on where they acquire the vehicles.

Due to the complexity of managing Margin Cars and Qualifying Cars in a dealership’s inventory, businesses in the motor industry should use specialized systems to ensure proper VAT treatment is applied. This not only ensures compliance with VAT regulations but also helps in maintaining accurate financial records.

Legal and Compliance Considerations

Adhering to HMRC’s guidelines is critical. Dealers must:

  • Retain all relevant records for at least six years.

  • Ensure accurate VAT reporting.

  • Be prepared for potential audits.

Non-compliance can lead to financial penalties and reputational damage.

The VAT Margin Scheme is a powerful tool for UK car dealers, enabling them to manage their VAT obligations effectively while staying competitive. By understanding the rules, maintaining accurate records, and avoiding common mistakes, dealers can leverage the scheme to their advantage. For those unsure about compliance, consulting a VAT specialist is always recommended.

Simplify VAT Margin Management with Haswent

Managing the complexities of the VAT Margin Scheme can be time-consuming, but the Haswent Composer dealer management system makes it simple. Our system provides UK car dealers with powerful tools to streamline operations and stay compliant:

  • Branded Invoices: Create professional purchase invoices, sales invoices, and invoices for finance companies with ease.

  • Cost Tracking: Attach costs to each vehicle, such as auction fees, to accurately calculate the stand-in value.

  • Profit and VAT Margin Calculation: Automatically calculate profit and VAT margin for every vehicle, saving you time and reducing errors.

  • Stock Book Management: Maintain a comprehensive stock book to track all transactions seamlessly.

  • Profit and Loss Insights: Gain clear visibility into your monthly profit and loss, helping you make informed business decisions.

With Haswent Composer, you can focus on growing your dealership while we handle the intricacies of VAT and record-keeping. contact us to learn more about how our dealer management system can support your business!

Frequently Asked Questions

Can new cars be sold under the Margin Scheme?

No, the VAT Margin Scheme applies only to used vehicles.

What happens if a vehicle is sold at a loss?

No VAT is payable if there is no profit margin.

Can VAT be reclaimed on purchases under the scheme?

No, input VAT cannot be reclaimed on vehicles bought under the Margin Scheme.

Can costs such as MOTs or delivery charges be deducted from the profit margin?

You cannot deduct costs from your margin before making the VAT calculation. However, if the cost was part of the car purchase price and the car could not be purchased without paying that cost, such as an auction buyer’s fee or admin fee, it can be bundled into the purchase price if it doesn't include VAT. If it does include VAT, record it separately as it can't be bundled in, but you can still reclaim that VAT.

What vehicles are eligible for the Margin Scheme?

Vehicles previously owned by private individuals or non-VAT registered entities are eligible. Vehicles bought from VAT-registered businesses where VAT was charged on the full selling price are not eligible.

What records must be kept for the VAT Margin Scheme?

You must keep purchase and sale invoices, stock books detailing each transaction, and documents proving eligibility for the scheme. These records must be retained for six years.

How is VAT calculated under the Margin Scheme?

VAT is calculated on the profit margin, which is the selling price minus the purchase price. For example, if the profit margin is £1,000, the VAT payable would be £166.67 (20% of £1,000).

What are the benefits of using the VAT Margin Scheme?

The main benefits include a lower tax liability since VAT is calculated only on the profit margin, and the ability to offer more competitive pricing to customers.

Can the VAT Margin Scheme be used for motorhomes or motorcycles?

Yes, the scheme can be used for motorhomes, motorcycles, and other used vehicles, provided they meet the eligibility requirements.

What happens during a VAT audit?

During a VAT audit, HMRC will review your records to ensure compliance with the Margin Scheme rules. It is essential to have all purchase and sale invoices, stock books, and supporting documents properly organised.

Can costs such as MOTs or delivery charges be deducted from the profit margin?

You cannot deduct costs from your margin before making the VAT calculation. However, there is an exception: if the cost was part of the car purchase price and the car could not be purchased without paying that cost, such as auction buyer’s fee or admin fee. In this case, as long as that fee does not include VAT, it can be bundled into the purchase price. If it does have VAT, make sure you record it separately as it can’t be bundled in, but you’ll still reclaim that VAT paid.

Do I have to pay VAT?

You only need to pay VAT if you are VAT registered, you can check the latest HMRC guidance, which currently states that you must register for VAT if either:

  • Your total taxable turnover for the last 12 months goes over £90,000 (the VAT threshold)
  • You expect your taxable turnover to go over £90,000 in the next 30 days

Can I use software to manage the VAT Margin Scheme?

Yes, dealer management systems like Haswent Composer can simplify the process by automatically calculating VAT margins, maintaining stock books, and tracking profits and losses.