The VAT margin scheme lets VAT-registered used car dealers pay VAT only on their profit margin, not on the full selling price. For a vehicle bought without VAT being charged (from a private seller, for example) and sold on at a profit, VAT due is calculated as the margin multiplied by 1/6 (the same as margin x 20/120). If a car sells for the same price it was bought for, or at a loss, no VAT is due on that sale.
This guide explains who can use the scheme, exactly how the calculation works with worked examples, what a margin scheme invoice must (and must not) show, the records HMRC expects you to keep, and how this fits with Making Tax Digital.
This article is a plain-English guide, not tax advice. VAT rules have exceptions and edge cases, so always check the current position with HMRC or your accountant before relying on it for a specific sale.
What is the VAT margin scheme?
Normally, a VAT-registered business charges VAT on the full value of what it sells. The problem for used car dealers is that most stock is bought from private individuals, who cannot charge VAT because they are not VAT-registered. Without a special scheme, a dealer would have to charge VAT on the whole resale price of a car it bought VAT-free, effectively taxing the same value twice.
The VAT margin scheme for second-hand vehicles fixes this. Instead of VAT on the full selling price, you account for VAT only on the difference between what you paid for the vehicle and what you sold it for, the margin. It is set out in HMRC's VAT Notice 718/1 and is one of the most commonly used VAT schemes among independent used car dealers.
Who can use the margin scheme for cars
You can use the margin scheme on a used vehicle if you are VAT-registered and you bought the vehicle without being charged VAT, typically because it came from:
- A private individual (the most common source of margin scheme stock)
- Another dealer who sold it to you under the margin scheme themselves
- A business that was not able to charge VAT on the sale (for example, a business using the margin scheme, or one that was not VAT-registered)
The vehicle also has to be genuinely second-hand and eligible for resale as stock, and you have to intend to resell it.
When you cannot use the margin scheme
You cannot put a vehicle through the margin scheme if VAT was charged on your purchase and you reclaimed it as input tax, for example a car bought from another VAT-registered dealer on a standard VAT invoice, or an ex-fleet or ex-lease vehicle sold with VAT shown separately. In that case, the vehicle sits outside the margin scheme entirely: you must charge VAT on the full selling price when you sell it on, and issue a normal VAT invoice showing that VAT.
Mixing this up, applying the margin scheme to a vehicle where you reclaimed input VAT, is one of the more common errors HMRC flags in used car dealer VAT reviews, so it is worth checking the purchase paperwork for every vehicle before deciding which VAT treatment applies.
How the margin scheme VAT calculation works
The core formula is simple:
VAT due = margin x 1/6
Where margin = selling price minus purchase price, and 1/6 is the same fraction as 20/120, because VAT is 20% and the margin is treated as a VAT-inclusive figure. You are not adding 20% on top of the margin, you are extracting the VAT element that is already deemed to be included within it.
A few points that matter for getting this right:
- Each vehicle is normally calculated individually, using its own purchase price and its own selling price.
- Costs like refurbishment, valeting, MOT work, or parts do not adjust the margin. The margin is purchase price versus selling price only. VAT you were charged on repairs or parts can usually still be reclaimed as normal input tax, separately from the margin scheme calculation.
- If the margin works out at nil or negative (you sold for the same price you paid, or at a loss), there is no VAT to pay on that vehicle. You cannot generate a VAT refund from a loss-making sale.
- Delivery mileage, part-exchange allowances given to a customer, and any discounts all feed into the final selling price used in the calculation.
Worked examples
Example 1: straightforward profit
A dealer buys a used hatchback from a private seller for £8,000 and sells it two weeks later for £9,500.
- Margin = £9,500 - £8,000 = £1,500
- VAT due = £1,500 x 1/6 = £250
- Net margin after VAT = £1,500 - £250 = £1,250
Example 2: tighter margin
A dealer buys a part-exchange car for £11,000 and, after reconditioning costs, sells it for £11,600.
- Margin = £11,600 - £11,000 = £600
- VAT due = £600 x 1/6 = £100
- Net margin after VAT = £500
Note that the reconditioning costs are not added into the £11,000 purchase price for this calculation, even though they reduce the dealer's overall profitability on the deal.
Example 3: sale at a loss
A dealer buys a car for £12,000 and, after a slow month, sells it for £11,800 to clear stock.
- Margin = £11,800 - £12,000 = -£200
- VAT due = £0 (no VAT is payable on a negative margin)
Running these numbers vehicle by vehicle, across dozens of cars a month, is exactly the kind of repetitive calculation that is easy to get wrong on a spreadsheet and straightforward to automate in a proper dealer management system.
What a margin scheme sales invoice must show
Margin scheme invoices look different from normal VAT invoices, and getting the wording wrong is a common compliance slip. A margin scheme sales invoice must:
- Show the total selling price as normal
- Include wording confirming the sale is under the margin scheme, such as "margin scheme - second-hand vehicles"
- Not show a separate VAT amount or VAT rate anywhere on the invoice
The VAT is not shown separately because the customer cannot reclaim it as input tax, the whole point of the scheme is that VAT is accounted for on the margin, not itemised against the sale. Issuing an invoice that both references the margin scheme and shows a VAT breakdown is a common mistake that can cause problems if HMRC reviews your records. Standardising this wording across every sale, rather than relying on staff to remember the correct invoice format for each transaction, is one of the easiest wins for compliance.
Record-keeping for the margin scheme
Because there is no VAT shown on the invoice, HMRC relies on your underlying records to prove the VAT you have accounted for is correct. For each vehicle sold under the margin scheme you need to keep:
- A stock book or margin scheme record with a unique stock number per vehicle
- Purchase details: date, stock number, purchase price, and who you bought it from (name and address, or a note that it was a private individual)
- Sales details: date, stock number, selling price, and who you sold it to
- The margin and VAT calculation for that vehicle
These records need to be kept for at least six years, the same as other VAT records, and should be available if HMRC asks to review them. Where the margin scheme purchase and sale records are the difference between a clean VAT inspection and a drawn-out one, having every vehicle's paperwork attached to a single, searchable stock record rather than scattered across paper files and separate spreadsheets makes a real difference.
The margin scheme and Making Tax Digital
Making Tax Digital (MTD) for VAT requires VAT-registered businesses to keep digital records and file VAT returns through MTD-compatible software, with digital links between the records and the return rather than manual re-typing of figures. Using the margin scheme does not exempt you from MTD, you still need digital records covering your sales and the VAT due, and the total margin scheme VAT for the period still needs to flow through to your VAT return without being manually retyped between systems.
In practice, this means your stock records (purchase price, sale price, margin, VAT due per vehicle) need a digital link through to your accounting software and then to your VAT return, rather than living purely on paper or in a spreadsheet that someone re-keys into your accounts. For more detail on what MTD actually requires for dealers, see our guide to Making Tax Digital for car dealerships.
How Vehiso helps with margin scheme invoicing and VAT
Vehiso's dealer management system handles margin scheme invoicing as part of standard vehicle sales, so every invoice carries the correct margin scheme wording automatically, without VAT shown separately, and every deal keeps its purchase price, selling price, and margin attached to the vehicle record rather than a separate spreadsheet.
Vehiso's accounting sync with Xero, QuickBooks, and Sage carries those figures through to your books with a digital link, which supports MTD compliance instead of relying on someone manually re-entering sales data at month end. Combined with proper stock records and invoicing, that gives you an audit trail for every margin scheme sale from purchase to VAT return. Our guide to car dealer invoicing covers how the invoicing side works in more detail.
Frequently asked questions
What is the VAT margin scheme for cars?
It is a VAT scheme that lets VAT-registered dealers pay VAT only on the profit margin of a used vehicle, rather than on the full selling price, where the vehicle was bought without VAT being charged.
Who can use the VAT margin scheme when selling used cars?
Any VAT-registered dealer who buys a used vehicle without being charged VAT, most commonly from a private individual, another margin scheme dealer, or a business that could not charge VAT on the sale.
How do I calculate VAT under the margin scheme?
VAT due = margin x 1/6, where the margin is the selling price minus the purchase price. This is the same as margin x 20/120. If the margin is nil or negative, no VAT is due.
Can I use the margin scheme if I reclaimed VAT on a vehicle?
No. If you reclaimed VAT as input tax on the purchase, the vehicle must be sold under normal VAT rules, with VAT charged on the full selling price and shown on a standard VAT invoice.
What records do I need to keep for the margin scheme?
A stock book or margin scheme record for each vehicle showing the purchase details, sale details, and the margin and VAT calculation, kept for at least six years in case HMRC reviews them.
Does the margin scheme affect Making Tax Digital VAT returns?
You still need to comply with MTD when using the margin scheme. Your digital records need to cover sales and the VAT due, with a digital link through to your VAT return rather than manual re-entry.
