Buying and selling used cars: how the VAT margin scheme actually works

Picture a used-car dealer who buys a car for £6,000 from a private seller and sells it for £7,200. Under normal VAT rules, output tax on that £7,200 sale would be £1,200 — except the dealer never charged the customer VAT on top, and couldn't reclaim any on the purchase, because a private seller can't issue a VAT invoice. Charge VAT the normal way and the dealer is simply £1,200 worse off on every car.

The VAT margin scheme exists precisely for this. You account for VAT only on your margin — the difference between what you paid and what you sold for — not on the full selling price.

Buy at £6,000, sell at £7,200, and VAT is due on the £1,200 margin, not the £7,200. Because the margin is treated as VAT-inclusive, the VAT is £1,200 × 1/6 = £200.

That "1/6" is where we got our name. At 20%, the VAT fraction of a gross amount is one sixth.

When you can use it

You can use the margin scheme on a vehicle only if you bought it from someone who couldn't charge you VAT — typically a private individual, a non-VAT-registered dealer, or another dealer who themselves sold it to you under the margin scheme. The defining test: you didn't reclaim VAT when you bought it. If you received a normal VAT invoice on purchase and recovered the input tax, that vehicle is outside the scheme and the full selling price is taxable.

The stock book is not optional

The single most common way dealers lose the scheme is record-keeping. HMRC's record requirements for margin schemes have the force of law, and if your records don't stand up, HMRC can assess VAT on the full selling price of everything you've sold — retrospectively. For each vehicle you need a stock book entry showing purchase date and price, supplier details, a description, and the sale date, price and buyer.

A few rules that trip people up:

• Sold at a loss? No VAT is due, but there's no relief either — you can't offset a loss on one car against the profit on another. A loss simply produces a nil margin on that car.
• MOT included. If you sell the car with an MOT, that's a single supply — record the full selling price, MOT included, and calculate the margin on that.
• Part-exchange. Don't reduce the selling price by the part-ex value. Record the full selling price, and use the value you gave for the part-ex vehicle as its purchase price when you come to sell it on.
• Invoices. A margin-scheme sales invoice must not show VAT as a separate line. Showing it separately turns it into a normal taxable supply.

Where OneSixth comes in

Done by hand, the margin scheme is a spreadsheet and a stock book and a lot of discipline. OneSixth keeps the stock book for you, calculates the margin and the VAT on each sale, and posts the journal to your ledger — Xero, QuickBooks, Sage or FreeAgent — with the working papers attached and ready for an inspection. If a vehicle's bought-in details make it ineligible, it flags that before you sell, not after.