If you're a VAT-registered used car dealer, the margin scheme is probably how you sell most of your stock. Instead of charging VAT on the full selling price, you account for VAT on your margin: the difference between what you paid for the car and what you sold it for. Here's how it works in plain English.
What is the VAT margin scheme?
The margin scheme is an HMRC scheme for second-hand goods, including used cars. When you buy a car without VAT being charged to you (for example from a private seller, or from another dealer who sold it under the margin scheme), you can sell it under the scheme and account for VAT only on your margin, not the full price.
It exists because no VAT could be reclaimed when you bought the car. Without the scheme, VAT would be charged again on the full value of a car that already had VAT paid on it when it was new.
How to work out margin scheme VAT
Your margin is the selling price minus the purchase price. The VAT is included in that margin, so at the standard 20% rate the VAT is one sixth of the margin.
| Example | |
|---|---|
| Purchase price | £8,000 |
| Selling price | £10,000 |
| Margin | £2,000 |
| VAT due (margin ÷ 6) | £333.33 |
| Your margin after VAT | £1,666.67 |
What counts as the purchase price?
- The purchase price is what you paid the seller for the car.
- Repair, valeting and preparation costs can't be added to the purchase price to reduce your margin. If you're VAT-registered and hold valid VAT invoices for that work, you reclaim the VAT on it in the normal way instead.
- For a part-exchange, the purchase price is generally the value you agree to allow for it against the car you're selling.
Margin scheme or VAT-qualifying?
Not every used car goes through the margin scheme. A VAT-qualifying car is one where VAT was charged and could be reclaimed when it was first bought, which is common with ex-fleet and ex-lease cars. If you buy a qualifying car and VAT is charged to you, you normally reclaim that VAT and charge VAT on the full selling price.
| Margin scheme | VAT-qualifying | |
|---|---|---|
| VAT charged on | Your margin | The full selling price |
| VAT shown separately on the invoice | No | Yes |
| Typical source | Private sellers, trade cars sold under the scheme | Ex-fleet and ex-lease cars sold with VAT |
Invoices and records HMRC expects
To use the margin scheme you need proper records for each car. In summary:
- A stock book (or an equivalent record) with the details of every car you buy and sell under the scheme.
- A purchase invoice or record for each car, showing what you paid and who you bought it from.
- A sales invoice for each car. A margin scheme invoice must not show VAT as a separate amount.
- Your VAT records, kept for at least six years.
How DealerGate handles it
In DealerGate you choose margin scheme or VAT-qualifying for each car. The purchase price is recorded when the car comes into stock, costs are logged against it, and the right VAT is worked out on the sales or finance-company invoice. Reports include a VAT summary with a quarter estimate. See accounts and margin VAT for more.
Frequently asked questions
How do you calculate VAT on a margin scheme car?
Take the selling price, subtract the purchase price to get the margin, then divide the margin by six. At the 20% standard rate, that's the VAT included in your margin. A car bought for £8,000 and sold for £10,000 has a £2,000 margin and £333.33 of VAT.
Can I include repair costs in the margin scheme purchase price?
No. The purchase price is what you paid the seller. If you're VAT-registered and have VAT invoices for repairs or preparation, you reclaim that VAT separately in the normal way.
Do I show VAT on a margin scheme invoice?
No. A margin scheme invoice must not show VAT as a separate amount, and the buyer can't reclaim VAT on it.
What happens if I sell a car at a loss?
There's no VAT to pay on that car. Each car is worked out on its own, so the loss can't reduce the VAT due on other cars.
What is a VAT-qualifying car?
A car where VAT was charged and could be reclaimed when it was first bought, often ex-fleet or ex-lease. You normally charge VAT on the full selling price of a qualifying car rather than using the margin scheme.
Let DealerGate do the VAT maths
DealerGate applies margin scheme or VAT-qualifying to every invoice and keeps the records together, as part of the complete DMS.