The VAT margin scheme on a used car, worked through

Under the margin scheme, a VAT-registered dealer pays VAT on the difference between what they paid for a second-hand car and what they sold it for, not on the whole selling price. It is for qualifying second-hand cars bought without VAT being charged — from a private seller, for example, or on another dealer's margin scheme invoice.

HMRC sets the rules out in Using the VAT margin scheme for second-hand vehicles, which replaced VAT Notice 718/1 when HMRC withdrew the notice on 23 December 2021.

You buy a car from a private seller for £6,000 and sell it for £8,400.

The margin is £8,400 − £6,000 = £2,400, and the VAT due is £2,400 × 1/6 = £400, because 1/6 is the VAT fraction at the 20% standard rate. That is HMRC's method: take the purchase price from the selling price to get the margin, then multiply the margin by 1/6 (Using the VAT margin scheme for second-hand vehicles; the same sum is worked in section 3.3 of Notice 718/1).

The same car with £600 of prep

Now say you spent £600 getting it ready: tyres, a service, a valet. The margin for VAT does not change. HMRC's guidance says the purchase price does not include the cost of bringing the vehicle to sale — "any repairs, refurbishment, accessories or your business overheads" — and Notice 718/1 said you must not add those costs to the purchase price. VAT is due on the difference between buying and selling price, not on the profit you made.

So the VAT is still £400, and the prep comes out of your profit instead:

£8,400 − £6,000 − £600 − £400 = £1,400. The spreadsheet says £2,400; the car made £1,400.

Buy a car for £5,000, sell it for £4,600. The margin is negative, so there is no VAT to pay on that car. Notice 718/1 said that where the purchase price is the same as or higher than the selling price, no VAT is due and you show the VAT due as nil in your stock book.

The £400 loss does not reduce the VAT on your other cars. The notice was direct about it: you must not offset VAT on vehicles sold at a loss against VAT on vehicles sold at a profit. The current guidance works the margin out per vehicle and asks for a stock book that tracks each one individually, so each car stands on its own.

You keep your normal VAT records, plus a stock book and copies of the purchase and sales invoices (Using the VAT margin scheme for second-hand vehicles). If you don't meet all the scheme's requirements, HMRC's margin schemes overview says you pay VAT on the full selling price.

The stock book, for each car (Notice 718/1, section 5.2):

• Stock number, in numerical sequence
• Date of purchase, purchase invoice number and purchase price
• Name of the seller
• Registration number and a description, such as make and model
• Date of sale, sales invoice number, and selling price or method of disposal
• Name of the buyer
• Margin on the sale (selling price less purchase price) and the VAT due (margin × 1/6)

The purchase invoice:

• Date, the seller's name and address, and your name and address
• Invoice number, unless you made out the invoice yourself — which you do when you buy from a private individual
• A description of the car, including its registration number
• The total price, with no other costs added to it
• The stock book number; and, if you bought from another VAT-registered business, the wording "margin scheme - second hand goods"

The sales invoice:

• Date and invoice number
• Your name, address and VAT registration number
• The buyer's name and address
• The stock book number, and a description of the car including its registration number
• The total price — you must not show VAT separately
• The wording "margin scheme - second hand goods"

Sources: VAT margin schemes: keeping records and Notice 718/1, sections 5.2 and 5.3.

HMRC lists these as cars you cannot sell under the scheme (Using the VAT margin scheme for second-hand vehicles):

• New vehicles
• Vehicles imported into the UK, including ones collected on your behalf
• Any vehicle bought on an invoice that shows VAT separately — Notice 718/1 added "regardless of whether you reclaim the VAT"
• Vehicles where you reclaimed, or were entitled to reclaim, the VAT when you bought them
• Category A and B write-offs, and any vehicle subject to the End of Life Directive

At auction, if the auctioneer charges VAT separately on the hammer price, you cannot use the margin scheme for your onward sale (Buying second-hand vehicles using a VAT margin scheme).

HMRC's pages don't have a separate rule for ex-demonstrators or ex-lease cars. The same test applies to them as to anything else: look at the invoice you bought the car on. If it shows VAT, the car goes through normal VAT rules, and VAT is due on the full selling price.

• Adding prep to the purchase price. Repairs, refurbishment, accessories and overheads are not part of the purchase price, so they don't shrink the margin you pay VAT on.
• Showing VAT on the sales invoice. A margin scheme sales invoice shows the total price only. HMRC says you must not show VAT separately.
• Netting a loss against a profit. A car sold at a loss has nil VAT; it does not reduce the VAT on the next car (Notice 718/1).
• Putting a car bought with VAT through the scheme. If the purchase invoice shows VAT — including VAT on an auction hammer price — the car can't go through the margin scheme, whether or not you reclaimed that VAT.