VAT Margin Scheme for Used Cars

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Understanding the VAT Margin Scheme for Second-Hand Cars
This guide covers the essentials of the VAT margin scheme for second-hand cars, including which vehicles are eligible, how to maintain proper records, and how to accurately calculate VAT for your returns.

Table of Contents

Overview of the VAT Margin Scheme for Used Cars
Conditions for Using the Scheme as a Second-Hand Car Dealer 2.1 Vehicle Eligibility 2.2 Eligible Purchase Conditions 2.3 Record-Keeping Requirements
Steps to Calculate VAT on Second-Hand Car Sales 3.1 Determining the Selling Price 3.2 Determining the Purchase Price 3.3 Calculating the Margin
Example of the VAT Margin Scheme in Action
Reclaiming VAT on Overheads While Using the Margin Scheme

1. Overview of the VAT Margin Scheme for Used Cars
Second-hand car dealers who are VAT-registered can opt for an alternative method to calculate VAT using the margin scheme. This option is particularly useful since most customers cannot reclaim VAT on their purchases. Upon reaching the VAT threshold, dealers typically face two choices:

Adding 20% VAT to the sale price, potentially losing their competitive edge.
Absorbing the VAT within the sale price, reducing their profit margins.

Under the margin scheme, dealers only pay VAT at 1/6th of the margin (the difference between the purchase price and sale price) instead of the full sale value.

2. Conditions for Using the Scheme as a Second-Hand Car Dealer
The margin scheme is optional and applies on a case-by-case basis. Dealers can decide whether to use the scheme for specific sales based on eligibility and financial considerations. The key conditions are:
2.1 Vehicle Eligibility
For a vehicle to qualify under the margin scheme, it must meet HMRC’s criteria for being “second-hand,” meaning it:

Has been previously used for business or leisure purposes.
Is fit for further use either as-is or after repairs.

2.2 Eligible Purchase Conditions
The vehicle must be purchased under specific conditions:

Bought from private individuals in the UK or another EC member state.
Purchased from businesses not registered for VAT.
Acquired from dealers who cannot reclaim input VAT.
Bought from VAT-registered car dealers who sold it under the margin scheme (this should be indicated on the invoice).
Obtained from VAT-registered dealers in other member states who supplied it under a margin scheme.

The scheme does not apply to:

New vehicles (even if they have registration and delivery mileage).
Vehicles bought with invoices showing VAT separately (regardless of whether the VAT was reclaimed).
Vehicles imported from other member states without a margin scheme.
Imported vehicles.

2.3 Record-Keeping Requirements
Dealers using the margin scheme must maintain standard VAT records along with additional documentation, including:

A margin scheme stock book.
Sales and purchase invoices specific to the margin scheme.

3. Steps to Calculate VAT on Second-Hand Car Sales
VAT under the margin scheme is based on the difference between the selling price and the purchase price. The following rules apply when calculating these figures:
3.1 Determining the Selling Price
The selling price includes the total amount received for an eligible vehicle, incorporating:

Directly linked expenses.
Accessories fitted before the sale.

3.2 Determining the Purchase Price
The purchase price used for the margin scheme calculation may differ from the profit calculation. It includes the amount paid for the vehicle, along with any incidental costs like delivery, but excludes expenses for repairs, refurbishment, or added accessories.
3.3 Calculating the Margin
The margin is calculated as the difference between the selling price and the purchase price. VAT is then applied at 1/6th of this margin.

4. Example of the VAT Margin Scheme in Action
A dealer buys a used car for £2,000 and sells it for £3,000.

Selling Price: £3,000
Purchase Price: £2,000
Margin: £1,000
VAT Payable (1/6th of £1,000): £166.67

5. Reclaiming VAT on Overheads While Using the Margin Scheme
Dealers can still reclaim VAT on overheads, such as rent or utilities, under the standard VAT scheme rules. The margin scheme only applies to eligible car sales, ensuring dealers don’t miss out on claiming VAT on their business expenses.