How it works for car dealers
Once you're VAT-registered, selling a used car at the full 20% VAT either makes you uncompetitive or eats your margin. The margin scheme fixes that: you pay VAT only on the difference between what you paid for the car and what you sold it for — one sixth of that margin.
| You buy a car (private seller) for | £6,000 |
| You sell it for | £7,800 |
| Margin (sale − purchase) | £1,800 |
| VAT due (margin ÷ 6) | £300 |
Under standard VAT you'd owe £1,300 on that same sale. The margin scheme is the difference between a workable business and an uncompetitive one.
Which cars qualify
A car can go through the margin scheme if you bought it in circumstances where no VAT was reclaimable. In practice that usually means:
- Bought from a private individual (the most common case)
- Bought from a dealer who sold it to you under the margin scheme
- Bought from a business that couldn't reclaim VAT on it
The car must be genuinely second-hand — it must have been used on the road. The key disqualifier: if the purchase invoice shows VAT separately, the car cannot go through the scheme, even if you didn't reclaim that VAT. New cars never qualify.
The mistake that costs dealers money
Preparation costs — valeting, repairs, MOT work, getting a car ready for sale — cannot be deducted from the margin before you calculate VAT. The margin is purely sale price minus purchase price. You handle those costs separately, reclaiming any VAT on them under the normal rules. Folding them into the margin understates your VAT and is exactly the kind of error an inspection finds.
The stock book HMRC expects
Car dealers must keep a stock book recording every margin scheme vehicle: a stock number and description, the purchase date and price, the seller's name and address, and the sale date and price. If your records are inadequate, HMRC can charge VAT on the full selling price instead of the margin — so the record-keeping is as important as the calculation. More on the stock book requirements here.
Common questions
Does the margin scheme go on my VAT return differently?
Yes. The VAT on your margins goes in Box 1. The full selling prices of your margin scheme cars feed Box 6, and the full purchase prices feed Box 7 — calculated differently from standard VAT. A common error is putting only the margin in Box 6 rather than the full sale price.
Can I show VAT on a margin scheme invoice?
No. A margin scheme sales invoice must not show a separate VAT figure, and should carry the required statement such as "Margin scheme — second-hand goods". Showing VAT separately can invalidate the scheme for that sale.
Is the scheme compulsory?
No — it's optional, and you can choose it car by car. Occasionally, selling to a VAT-registered buyer who can reclaim VAT, standard VAT can work out better. But for the typical retail customer, the margin scheme is what keeps your prices competitive.