What the margin scheme does
Most used cars are bought from private sellers, who don't charge VAT. Without a special scheme a dealer would have to charge 20% VAT on the full selling price with nothing to reclaim. The margin scheme fixes that: you pay VAT only on your margin – the difference between what you paid for the car and what you sold it for.
The VAT is one-sixth of the margin at the 20% rate, and it is not shown separately on the customer's invoice.
A worked example
| Car bought from a private seller, then sold | £ |
|---|---|
| Selling price | 9,500.00 |
| Less purchase price | (8,000.00) |
| Margin | 1,500.00 |
| VAT due: £1,500 × 1/6 | 250.00 |
If you spent £400 plus VAT on preparing the car, that £400 is not added to the purchase price. You reclaim the VAT on the repair bill in the normal way instead.
Which vehicles qualify
The scheme covers used motor vehicles that meet the normal margin scheme conditions. The key test for dealers is the purchase invoice: you cannot use the scheme for a vehicle bought on an invoice that shows VAT separately, whether or not you reclaimed that VAT. That rules out many ex-lease, ex-fleet and ex-rental cars, which have to be sold with full VAT.
HMRC also excludes, among others:
- new vehicles – registration and delivery mileage do not make a car "used";
- most vehicles imported into the UK;
- category A and B write-offs;
- vehicles bought in Great Britain for resale in Northern Ireland.
Vehicles that don't qualify are sold with VAT charged and reclaimed in the normal way.
What goes into the purchase and selling price
Purchase price
Everything you paid for the vehicle – but not repairs, refurbishment, accessories or overheads. You reclaim the VAT on those costs separately if you hold a VAT invoice.
Selling price
Everything you receive for the vehicle, from the buyer or anyone else, including costs directly linked to the sale. An MOT needed to make the car saleable, or accessories fitted before the sale, are part of the selling price.
Part-exchanges
The part-exchange allowance is part of the selling price of the car you sell, and the same figure becomes the purchase price of the car you take in. If a customer pays £7,000 and part-exchanges a car valued at £5,000, your selling price is £12,000 and the part-exchange goes into stock at £5,000.
Cars sold at a loss
If a car sells for the same as or less than you paid, the margin and the VAT are both nil. Record it as nil in your stock book. A loss on one car cannot be set against the margin on another, so the VAT due for a period is the total of the positive margins only.
The records HMRC expects
You need your normal VAT records plus a stock book that tracks each vehicle individually. HMRC expects it to show:
- when bought: stock number, purchase date, purchase invoice number, purchase price, seller's name and a description of the vehicle;
- when sold: sale date, sales invoice number, selling price, buyer's name, the margin and the VAT due.
Purchase and sales invoices must also show the vehicle's registration number (or VIN if it has none) and a description such as make and model. Your sales invoice must not show VAT separately and must carry the wording "margin scheme – second hand goods".
Where Click Dealer helps. Click Dealer already holds most of this detail for each vehicle – purchase, part-exchange and sale. Keeping it complete, and making sure the VAT treatment of each car is set correctly, is the simplest way to keep your stock book in order.
How margin sales go on the VAT return
| Box | What goes in it | Example (£) |
|---|---|---|
| Box 1 | VAT due on the margins | 250.00 |
| Box 6 | Full selling price less the VAT on the margin | 9,250.00 |
| Box 7 | Full purchase price of vehicles bought | 8,000.00 |
Margin scheme sales and purchases are not included in boxes 8 and 9.
Mistakes we see most often
- VAT-qualifying cars – bought on an invoice showing VAT – sold under the margin scheme.
- Preparation costs added to the purchase price, which understates the margin and the VAT.
- Loss-making cars netted against profitable ones, reducing the VAT due.
- Part-exchanges valued differently in Click Dealer and in the accounts.
- Sales invoices that show VAT or leave out the margin scheme wording.
Related: month-end reconciliation checklist and who files your VAT return.
This guide is a summary for dealers, not a full statement of the rules. HMRC reorganised its margin scheme guidance in November 2026, replacing VAT Notices 718 and 718/1 with new GOV.UK pages. Sources: Using the VAT margin scheme for second-hand vehicles, How to work out the margin and VAT due, Keeping records and VAT return (GOV.UK).