How is VAT calculated under the margin scheme?

You pay VAT on your margin — the selling price minus the purchase price. Because the margin is treated as VAT-inclusive, the VAT due is the margin multiplied by 1/6 (at the 20% standard rate). If there's no margin, there's no VAT to pay.

Do I have to use the margin scheme?

No, the scheme is optional, but for most used-car dealers buying from private individuals it dramatically reduces the VAT due. You can choose which eligible vehicles to include, but you must meet the record-keeping conditions for every vehicle you put through it.

What records do I need to keep?

A stock book with, for each vehicle: a stock number, the purchase date, purchase price and seller's name and address, then the sale date, sale price and buyer's name and address, plus the margin and the VAT due on it. You also keep purchase and sales invoices.

What happens if my records are wrong?

HMRC can refuse the margin scheme for that vehicle and charge VAT on the full selling price, not just the margin. A single incomplete or inaccurate entry can be enough, which is why accurate record-keeping matters so much.

Can I reclaim VAT on a margin scheme car?

No. You cannot reclaim VAT on the purchase of a vehicle you sell under the margin scheme, and your sales invoice must not show VAT separately. The trade-off is that you only account for VAT on the margin.

Guides · 8 min read

The VAT margin scheme for used car dealers

If you buy used cars from private sellers and sell them on, the VAT margin scheme can be the difference between paying VAT on your profit and paying it on the entire sale price. Here's how it works — and what you must get right to use it.

What is the VAT margin scheme?

Normally, a VAT-registered business charges VAT on the full price of what it sells. That's a problem for used-car dealers: when you buy a car from a private individual, there's no VAT on the purchase for you to reclaim, so charging VAT on the full resale price would tax value that was never VAT-free to begin with. The margin scheme fixes this by letting you account for VAT only on your margin — the difference between what you paid and what you sold it for.

Who can use it?

The scheme is generally available to VAT-registered dealers selling eligible second-hand vehicles — typically cars bought from private individuals, dealers not registered for VAT, or other dealers who sold them to you under the margin scheme. It's optional and you can decide vehicle by vehicle, but if you do use it you must meet the record-keeping conditions for that car. You can't use it for a vehicle where you reclaimed VAT on the purchase.

How the VAT is calculated

Your margin is treated as VAT-inclusive, so at the 20% standard rate the VAT due is the margin multiplied by 1/6. If you sell a car for no more than you paid, there's no margin and no VAT to pay.

Worked example

Purchase price: £6,000
Sale price: £7,200
Margin: £1,200
VAT due (£1,200 ÷ 6): £200

Without the scheme, VAT on the full £7,200 sale would be £1,200 — six times as much.

The records HMRC expects

The scheme runs on a stock book. For every vehicle you sell under the margin scheme, you need a complete record showing:

A stock number for the vehicle
Purchase date, purchase price and the seller's name and address
Sale date, sale price and the buyer's name and address
The vehicle registration mark and description
The margin and the VAT due on that margin

You also keep the purchase and sales invoices, and your sales invoice must not show VAT as a separate line — that's a condition of the scheme.

The mistake that costs you

If your records for a vehicle are incomplete or inaccurate, HMRC can refuse the margin scheme for that car and charge VAT on the full selling price rather than the margin. A missing seller address or a reconstructed-after-the-fact entry can be enough. The defence is simple but unforgiving: a complete, accurate stock book kept at the time of each deal.

How Garage keeps you compliant

Garage builds the stock book for you as you trade. You record the purchase and seller details when you buy a car and the sale and buyer details when you sell it; the margin and VAT are calculated automatically, and the record is locked once the vehicle is sold so it stays a clean audit trail. When your accountant or HMRC needs it, you export the lot to CSV or PDF.

See VAT margin scheme record-keeping in Garage

Frequently asked questions

How is VAT calculated under the margin scheme?: You pay VAT on your margin — the selling price minus the purchase price. Because the margin is treated as VAT-inclusive, the VAT due is the margin multiplied by 1/6 (at the 20% standard rate). If there's no margin, there's no VAT to pay.
Do I have to use the margin scheme?: No, the scheme is optional, but for most used-car dealers buying from private individuals it dramatically reduces the VAT due. You can choose which eligible vehicles to include, but you must meet the record-keeping conditions for every vehicle you put through it.
What records do I need to keep?: A stock book with, for each vehicle: a stock number, the purchase date, purchase price and seller's name and address, then the sale date, sale price and buyer's name and address, plus the margin and the VAT due on it. You also keep purchase and sales invoices.
What happens if my records are wrong?: HMRC can refuse the margin scheme for that vehicle and charge VAT on the full selling price, not just the margin. A single incomplete or inaccurate entry can be enough, which is why accurate record-keeping matters so much.
Can I reclaim VAT on a margin scheme car?: No. You cannot reclaim VAT on the purchase of a vehicle you sell under the margin scheme, and your sales invoice must not show VAT separately. The trade-off is that you only account for VAT on the margin.

This guide is general information, not tax or legal advice, and VAT rules change. Check the current HMRC guidance (VAT Notice 718/1) or speak to your accountant about your specific circumstances.

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