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How the Margin Scheme accounts for VAT when selling second-hand vehicles

How the Margin Scheme accounts for VAT when selling second-hand vehicles

Stuart Datlen

If you run a business that sells second-hand vehicles and you have not been charged VAT when purchasing the vehicles, using the Margin Scheme could potentially save you some money.

If a business uses the margin scheme when purchasing second hand vehicles it will receive the following benefits:
  1. There is no requirement to charge VAT on the full selling price of the vehicle as VAT is only due on the margin
  2. If the business does not sell the vehicle at a profit no VAT will be due on the sale
Only second-hand vehicles can be sold under the margin scheme and the scheme cannot be used if VAT has been reclaimed on the purchase of the vehicle.

If you did not use the VAT Margin Scheme, you would have to account for VAT on the full selling price of each vehicle. However, by using the margin scheme, you can account for VAT on the difference between the price you paid for a second-hand vehicle and the sales price when you sell the car.

The margin scheme is not compulsory meaning you can choose whether to sell the vehicle inside or outside of the scheme. Please be aware that once the decision has been made on whether to use the scheme or not, you cannot subsequently amend the sale to change the decision. 

When you can use the scheme

When both:
  • The vehicle is eligible
  • The vehicle was brought in eligible circumstances
Second-hand vehicles bought from the following will be eligible:
  • Private individuals
  • Businesses not registered for VAT
  • Dealers or businesses who were unable to reclaim the input VAT on purchase
  • VAT-registered dealers, if sold to you under the margin scheme (you should be able to decipher this from the invoice you receive)
  • Motability – for which you have an invoice showing VAT charged at the zero rate
If you decide to use the scheme, there are conditions you will have to meet. If you cannot meet all the conditions, you will not be able to use the scheme.

The main conditions include:
  • The vehicles must be eligible,
  • You must have acquired the vehicles in eligible circumstances - in most cases, this means that you have obtained eligible vehicles for resale in circumstances where VAT was not chargeable,
  • You must calculate the margin in accordance with the rules of the scheme, there are special rules about how to calculate your buying price, your selling price and your margin under the scheme, your margin may not be the same as your profit margin,
  • You must meet the record-keeping rules of the scheme, there are special rules about invoicing and stock records.
Other factors of the scheme
  1. You can reclaim the VAT charged on business overheads such as repairs, parts or accessories but these costs must not be added to the purchase price of the vehicle
  2. If purchasing the vehicle form an online auction site, you are responsible for finding out if the person selling and the vehicle are both eligible
  3. You must keep records of purchase and sales details in your stock books as well as including margin scheme calculations under the appropriate headings. Records should be kept for at least 6 years. 
Calculating the scheme

Under this scheme you will only have to account for VAT when you sell a vehicle for more than you paid for it, below shows how to work out the VAT due on an individual sale.

Term Amount
(a) Purchase price £2000
(b) Selling price £2500
(c) Gross Margin (b-a) £500
(d) VAT payable (c x 1/6) £83.33

If you require more information or assistance with the Margin Scheme or how to report it on your VAT return, please contact your local Moore (South) office