Part Exchange Explained: A Guide for UK Car Dealers

Last updated 29 September 2026.

Part exchange is the most common way a used car deal gets done, and one of the easiest places to lose margin without noticing. The number the customer sees, the number that goes in your stock book and the number HMRC cares about are not always the same. This guide explains what part exchange is, how the value is worked out, how it goes through the VAT margin scheme, and what to do when the car has finance on it or turns up in worse condition than described. There is a short section for customers near the end.

This is general guidance based on HMRC, FCA, DVLA and Citizens Advice material as of September 2026, not tax or legal advice. Check the linked pages, or ask your accountant, before you rely on a detail.

What is part exchange?

Part exchange is a customer trading in their current car against the one they are buying from you. You agree a value for their car (the PX allowance), it is taken off the price of your car, and the customer pays the balance by cash, card, bank transfer or finance. It is also called a trade-in or a PX. Our A to Z of car dealer slang covers the rest of the shorthand.

For you, a part exchange is two deals on one invoice. You sell a car, and you buy one. Each has its own price, its own entry in your stock book and its own margin.

How is a part exchange value worked out?

A PX value starts from what the car is worth to the trade today, not what the customer thinks it is worth or what it is advertised for. From there you adjust for the car in front of you:

1. Trade guide value. CAP HPI and AutoTrader give trade and part exchange figures by age, mileage and specification. Our AutoTrader valuations guide explains each figure, and our guide to CAP clean, retail and trade values covers CAP’s.
2. Condition and history. Damage, tyres, missing service history, a second key that isn’t there, or a write-off marker all take money off.
3. Preparation costs. Price the work needed to get it to retail standard, or the cost of selling it to the trade if you won’t retail it. Our guide to selling to the trade covers the second route.
4. Demand. How quickly that model sells in your area and whether it fits your forecourt at all.

The figure you can afford to allow is roughly what you will get for the car, less preparation, less the profit you need on it. Our vehicle appraisal best practices cover the inspection and valuation steps in detail.

Overallowance or discount: why the split matters

An overallowance is giving the customer more for their PX than it is worth to the trade, instead of taking the same amount off the price of your car. Customers often care more about the headline PX figure than the discount, so dealers commonly show a bigger allowance and a smaller discount. The balance the customer pays is the same. What changes is how the deal looks in your books and to HMRC.

Under the VAT margin scheme, HMRC’s rules on part exchanges are specific (HMRC: if you take a vehicle as part exchange):

• The car you sell: you must not reduce its selling price by the value of the part exchange. The stock book shows the full price.
• The car you take in: its purchase price is the value you agreed with the customer and showed on the invoice. If you over-allowed, you still record the over-allowed figure.

A discount, by contrast, lowers what you receive for the car you sell, and HMRC defines your selling price as everything you receive for the vehicle (HMRC: selling price). So a discount reduces the margin on that sale straight away.

Two further rules decide whether the split costs you money. If you sell a vehicle for less than you paid, there is no margin and so no VAT to pay on it, but you cannot set that loss against the margin on another car. Only HMRC’s global accounting scheme allows that, and it does not cover cars (HMRC VAT margin schemes manual, VATMARG03050). So an overallowance moves margin, and the VAT on it, onto the car you sell today. It only evens out if the PX later sells for at least the over-allowed figure.

It matters for your management figures too. An overallowance makes the car you sold look more profitable and gives the PX a stand-in value above what the trade will pay. If you trade it out at its real value, that car shows a loss on a deal that was, overall, fine.

Worked example

The figures below are illustrative, to show the mechanics. They are not typical prices or margins. VAT on the margin is one-sixth at the 20% standard rate, as explained in our VAT margin scheme guide.

You bought a car for £9,000 and it is up for £12,000. The customer’s car is worth £4,000 to the trade. You agree a deal where they pay £7,500.

Illustrative figures	Deal A: £500 discount	Deal B: £500 overallowance
Selling price of your car	£11,500	£12,000
PX allowance	£4,000	£4,500
Customer pays	£7,500	£7,500
Margin on your car	£2,500	£3,000
VAT on that margin	£416.67	£500.00
PX purchase price in your stock book	£4,000	£4,500
If you retail the PX for £5,500: VAT on the PX	£250.00	£166.67
If you trade the PX out for £4,000: VAT on the PX	Nil	Nil (a £500 loss you cannot offset)

If you retail the PX for £5,500, both deals pay £666.67 VAT in total. Deal B just pays more of it sooner. If you trade the PX out for £4,000, deal A pays £416.67 and deal B pays £500. The overallowance cost £83.33 in VAT and left a loss-making car in your stock book. Our free VAT margin calculator will run your own numbers.

Part exchange with outstanding finance

A customer can part exchange a car with finance on it, but the finance has to be paid off as part of the deal. On hire purchase, Citizens Advice says the customer does not own the car until they have paid in full, and must not sell it without the lender’s permission (Citizens Advice: hire purchase and conditional sale).

In practice:

1. Get a settlement figure. This is the amount needed to clear the agreement in full. Citizens Advice says the customer can ask the lender for an early settlement figure, and has 28 days from when the lender received the request to pay it off. Under the Consumer Credit Act, settling early reduces the total the customer pays (Citizens Advice: paying off a credit agreement early).
2. Pay the lender directly. The dealer usually pays the settlement to the finance company out of the PX value, rather than handing money to the customer and trusting them to do it.
3. Get written confirmation that the agreement is settled, and run a history check to see the finance marker clear.

Don’t skip step 3. Citizens Advice explains that the protection for someone who unknowingly buys a car still on finance only applies to private buyers, not to anyone who buys cars to sell them on (Citizens Advice: if the car you bought is still on hire purchase). If the finance is not cleared, the lender can come after the car in your stock.

Check your FCA permissions as well. The FCA’s authorisation guidance for motor dealers lists offering part exchange on vehicles with outstanding finance as needing limited permission debt adjusting and debt counselling, limited to relevant credit activities, on top of credit broking (FCA: motor dealers).

Positive and negative equity

If the PX value is more than the settlement figure, the customer has positive equity. The difference comes off the car they are buying like any other allowance. If the settlement is more than the PX value, they have negative equity, and that shortfall has to be paid. The customer can pay it in cash, or ask for it to be included in the amount they borrow for the next car, if the lender will agree. Rolling it in means borrowing more against a car worth less than the loan, so make sure the customer understands what they will owe and that the finance paperwork shows the real figures. HMRC requires the values on documents you send to a finance company, including the part exchange and any deposit, to match the values in your own books (HMRC: selling second-hand vehicles using a VAT margin scheme).

How a part exchange goes on the invoice and in the margin scheme

The PX is shown on the sales invoice as an allowance against the full price of your car, and it goes into your stock book as a purchase. If you buy from a private person, or a business that is not VAT registered, HMRC says you may include the details of the part exchange on your sales invoice, as long as that invoice meets all the margin scheme invoice rules. If your customer is VAT registered, they must give you a sales invoice for their car (HMRC: if you take a vehicle as part exchange).

Where the PX had finance, a typical invoice shows the car’s full price, less the PX allowance, plus the settlement you are paying to the lender, less any deposit, giving the balance due. The PX still goes into stock at the allowance you agreed. The settlement is money you pay on the customer’s behalf, not a change to the car’s value.

Before you take the PX into stock, check it is eligible for the margin scheme at all, as HMRC reminds dealers to do. Our margin scheme guide covers eligibility, the invoice wording and the stock book in full. For one-off invoices, our free car sales invoice generator handles part exchanges and settlements.

Paperwork and DVLA

A part exchange goes into the trade with DVLA exactly like a car you buy outright. Tell DVLA at the handover, deal with any private plate first, and tell the customer their tax will be refunded and their new car needs taxing. Our guide on how to put a car into the trade walks through the online service, the V5C/3 yellow slip and the checks to make.

Online part exchange valuations

An online part exchange calculator on your website gives customers a guide price from the registration and mileage before they visit. It can’t see the car, so treat it as a starting point and say so on the page.

A remote appraisal goes further. The customer sends photos, video and answers to your questions from their phone, and you value the car from what they sent. Always make the offer subject to inspection, give it an expiry date, and list what it assumes: the mileage, the service history, both keys and no damage beyond what was shown.

Be careful with the log book. DVLA warns keepers not to share the V5C document reference number or photos of the log book with potential buyers, because they can be used to clone the car (GOV.UK: selling a vehicle). Check the V5C in person when the car arrives, rather than asking for a photo of it.

When the car arrives and doesn’t match the description

If the car is not the car you valued, re-value it and tell the customer why before the deal completes. Point to the specific difference, such as extra mileage, damage that wasn’t in the photos or a missing key, and what it costs you to put right.

This conversation is much easier if your original offer said, in writing, that it was subject to inspection and based on what the customer told you. Without that, a lower figure on the day looks like a bait and switch, and you may lose the sale as well as the PX. Keep the photos and answers the customer sent.

Part exchange cars you don’t want to retail

Not every PX belongs on your forecourt. Older, high-mileage or off-brand cars are usually better traded out quickly, to another dealer, a trade buyer or a motor auction, than prepared and advertised. Value these on what the trade will pay after fees, not on retail.

If a low-value PX is only fit for parts or scrap, HMRC says you cannot account for those sales under the margin scheme. If you sell usable parts, you must account for VAT on the full selling price of each part.

Getting a better part exchange price: a guide for customers

If you are part exchanging your car, you’ll get the best price by making it easy for the dealer to value and resell:

• Clean it inside and out, and remove your belongings.
• Bring both keys, the V5C log book, the service history and any MOT and repair paperwork.
• Be upfront about damage and warning lights. It will be found at inspection anyway.
• If it has finance, get a settlement figure from your lender first, so you know whether you have equity.
• Compare deals on the balance you pay (the “cost to change”), not the headline PX figure. A big allowance on a car with no discount can cost you more than a smaller allowance on a car that has been reduced.

Common mistakes

Mistake	What to do instead
Netting the PX off the selling price in the stock book	Record the full selling price of your car. The PX is a separate purchase.
Overallowing by habit	Decide whether a discount or an allowance suits the deal, knowing an overallowance can cost VAT if the PX trades out at a loss.
Giving settlement money to the customer	Pay the lender directly and get written confirmation the agreement is cleared.
Different figures on the finance proposal and the invoice	The PX, deposit and price you give the lender must match your books.
Offers with no conditions	Put "subject to inspection" and an expiry date on every remote PX offer.

How Haswent helps

Haswent covers the part exchange from first valuation to stock:

• Car dealer websites include a part exchange form, and a valuation tool where it is set up on your site, so customers can tell you about their car before they visit.
• Remote appraisals let customers send guided photos, video and answers from their phone. You enter your valuation and an expiry date, and the customer is emailed the offer.
• With AutoTrader connected you see its retail, trade, part exchange and private valuations, and CAP HPI valuations (charged per valuation) show on the vehicle, appraisal and part exchange screens.
• In car sales invoicing, you add the PX to the deal with its allowance and any outstanding finance to settle. The allowance comes off the customer’s invoice and the settlement is added back. When you complete the deal, the PX goes into your stock with its own purchase invoice.

It won’t decide for you whether to discount or overallow, and it doesn’t settle the customer’s finance. You still pay the lender. Contact us for a demo.

Sources

• HMRC: using the VAT margin scheme for second-hand vehicles
• HMRC: selling second-hand vehicles using a VAT margin scheme
• HMRC: other products and circumstances affecting the second-hand vehicles VAT margin scheme (part exchange and hire purchase)
• HMRC VAT margin schemes manual: VATMARG03050, global accounting
• FCA: authorisation for motor dealers
• Citizens Advice: hire purchase and conditional sale
• Citizens Advice: paying off a credit agreement early
• Citizens Advice: if the car you bought is still on hire purchase
• GOV.UK: selling a vehicle

Frequently asked questions