Last updated: 14 October 2026
How does the VAT margin scheme work for car dealers?
The second-hand margin scheme lets VAT-registered car dealers charge VAT on their profit margin instead of on the full selling price of a used car. If you buy a car for £8,000 and sell it for £10,000, VAT is 1/6 of the £2,000 margin, which is £333.33, instead of £1,666.67 on the full price. You can only use the scheme for cars you bought without VAT, or under the margin scheme, and you must keep strict records for every car.
Which cars qualify
- Bought from private sellers
- Bought from dealers who sold them under the margin scheme
- Bought from VAT-registered businesses that couldn’t reclaim VAT on the car, for example a car with private use
- Not cars bought on a VAT invoice showing VAT you can reclaim
How to calculate the VAT
- Selling price, minus purchase price, equals the margin
2. VAT = margin × 1/6
3. If the margin is zero or negative, no VAT is due, and losses can’t be set against other cars
Costs such as repairs and valeting don’t reduce the margin. You can reclaim VAT on those costs separately.
Records you must keep
| Record | What it shows |
| Stock book | Each car’s registration, make, model, purchase and sale details |
| Purchase invoice | From the seller, with their name, address and price |
| Sales invoice | Your details, the buyer’s, and a statement that the margin scheme applies |
| No VAT shown | You must not show VAT on margin scheme invoices |
Example
| Car | Bought | Sold | Margin | VAT |
| Ford Focus | £6,500 | £7,995 | £1,495 | £249.17 |
| Audi A3 | £12,000 | £11,500 | −£500 | £0 |
Exports and EU sales
Since Brexit, cars exported from Great Britain can be zero-rated under normal export rules. Northern Ireland dealers may have different rules for EU stock.
Part-exchange
A part-exchanged car is a purchase at its part-exchange value, which becomes its margin scheme cost.
The global accounting option
Global accounting, where margin is worked out on total sales and purchases, isn’t available for cars, motorcycles, caravans, motorhomes, aircraft or boats.
Errors car dealers make with VAT
Using the margin scheme without the right paperwork is the most common problem. For each car, keep a stock book entry showing the purchase price, sale price and margin, and a purchase invoice showing that no VAT was charged. Cars bought with VAT, such as ex-lease vehicles from a VAT-registered seller, usually can’t go through the margin scheme. Dealers also forget that demonstrator cars and VAT on extras such as warranties and finance commissions need separate treatment.
A tip for dealers
Run a monthly reconciliation between your stock book and the margin scheme figures on your VAT return. It catches cars that were bought with VAT or sold without a margin record before HMRC does.
Frequently asked questions
Can I use the margin scheme for vans?
Yes, for used vans bought without reclaimable VAT.
Can a non-VAT-registered dealer use it?
No. The scheme is for VAT-registered dealers, although unregistered dealers don’t charge VAT anyway.
What if I don’t keep the records?
HMRC can charge VAT on the full selling price.
Can I choose not to use the scheme?
Yes, but you would charge VAT on the full price.
Related: accountants for garages.
Talk to Accotax
Want this handled for you? Our team at Accotax can help with VAT for car dealers. See our motor trade accountants service, or contact us for a free, no-obligation quote.
This page is general guidance based on HMRC rules for the 2026/27 tax year, checked against gov.uk on 14 October 2026. It is not personal advice, so speak to an accountant about your own situation.
