Under the margin scheme a dealer pays VAT on the profit margin, not on the full price, when no VAT could be reclaimed on the purchase. The VAT is one sixth of the profit margin at 20 percent. Preparation costs do not go into the purchase price, the invoice shows no VAT, and the records are kept per vehicle.
Most used vehicles a dealer buys come from people and businesses who do not charge VAT on them: private sellers, and other dealers selling under the margin scheme. Charging 20 percent VAT on the full selling price of those vehicles would tax value that was already taxed when the vehicle was first sold.
The margin scheme fixes this. HMRC's guidance on the margin scheme for second-hand vehicles sets out how a VAT-registered dealer accounts for VAT only on the difference between what they paid and what they sell for. For a used-vehicle dealer it is usually the most important VAT rule of all.
When the margin scheme applies
A vehicle can be sold under the margin scheme when it was bought without VAT shown on the invoice: from a private seller, from a business that is not VAT-registered, or from another dealer who sold it under the margin scheme. Once a vehicle is in the scheme, it can stay in it from dealer to dealer.
A vehicle bought with VAT on the invoice is different. If you could reclaim the VAT on the purchase, the sale is standard-rated: VAT is due on the full selling price. Some vehicles never qualify at all, among them new vehicles, vehicles imported into the UK and Category A and B write-offs. Get the purchase right, and the sale follows.
Working out the VAT
The profit margin for VAT is the selling price minus the purchase price. That figure includes VAT, so the VAT due is the VAT fraction of it: at 20 percent, one sixth.
Example: you buy a vehicle from a private seller for £14,000 and sell it for £17,000. The profit margin is £3,000 and the VAT due is £500. Had the full selling price been taxed, the VAT would have been £2,833.33.
If a vehicle sells for the same as or less than you paid, there is no VAT to pay on it, and the stock book shows nil. The loss does not reduce the VAT on any other vehicle: each vehicle is worked out on its own.
What goes into the purchase price
The purchase price is everything you pay the seller for the vehicle. The cost of bringing it to sale, such as repairs, parts, refurbishment, valeting and accessories, does not go into it, and neither do your overheads. These costs do not reduce the profit margin you pay VAT on.
You can still reclaim VAT on those costs as normal input tax, where you hold a VAT invoice for them. They are business costs, just not part of the margin scheme calculation.
Invoices and records
An invoice for a margin scheme sale must not show VAT separately, and it states that the margin scheme applies, with wording such as "Margin scheme: second-hand goods". If VAT is shown by mistake, the buyer may try to reclaim it, and you can end up accounting for it twice.
Keep the records per vehicle. HMRC expects a stock book that tracks each vehicle individually, with its purchase and sale, and copies of the purchase and sales invoices. For a vehicle bought from a private seller, you make out the purchase invoice yourself, with the seller's name and address, the date, the vehicle and its registration and the price. Without these records, HMRC can refuse the scheme and charge VAT on the full price.
Common mistakes
Four mistakes come up again and again. Adding preparation costs to the purchase price, which understates the VAT. Showing VAT on a margin scheme invoice. Using the margin scheme for a vehicle that was bought with VAT you could reclaim. And missing records, which can cost the scheme altogether at an inspection.
Each one is avoidable when the purchase is recorded properly on the day you buy, and the VAT treatment follows from it on the day you sell.
