July 5, 2026

VAT on used cars in the UK works differently from VAT on new cars. In most cases, you do not pay VAT on the full price of a used car. Instead, VAT is charged only on the profit margin the seller makes, under a system called the VAT margin scheme. This applies whether you are buying a used car for your business or selling used cars as part of your trade. Understanding how this works can save you money and keep you on the right side of HMRC’s rules. Below, we break down exactly how VAT on used cars is calculated, who it applies to, and what business owners and self-employed people need to know before their next purchase or sale. What is VAT on Used Cars? VAT on used cars refers to the Value Added Tax charged on the sale of a second-hand vehicle. Rather than charging VAT on the entire selling price, HMRC allows most used car sales to be taxed using the VAT margin scheme. This means VAT is only paid on the difference between what the seller paid for the car and what they sold it for, not the whole transaction. This system exists to stop the same car being taxed twice. A new car has VAT charged once when it is first sold. If every resale after that also charged VAT on the full price, the same VAT would effectively be paid several times over the life of one vehicle. The margin scheme prevents this by taxing only the value added at each sale. How Does the VAT Margin Scheme Work for Used Cars? The VAT margin scheme works by calculating VAT on the profit made from a sale, not the sale price itself. The current rate applied to the margin is one-sixth (16.67%) of the profit. Here is a simple example. If a dealer buys a used car for £5,000 and sells it for £6,200, the margin is £1,200. VAT is calculated on that £1,200, not on the full £6,200. At one-sixth, the VAT due would be £200. If a car is sold for the same price it was bought for, or for less, there is no margin, so no VAT is due on that sale. Dealers cannot claim relief on a loss either. Each vehicle is treated on its own, so a loss on one car cannot be used to reduce VAT owed on a profitable sale of another. What Counts as the Purchase Price and Selling Price? The selling price is the total amount the customer pays for the car, including any extras bundled into the deal. The purchase price is what was paid to acquire the vehicle, including delivery costs where relevant. It does not include money spent on repairs, valeting, or accessories added before resale. Those costs come out of the dealer’s profit but do not affect the VAT margin calculation itself. Who Can Use the VAT Margin Scheme? Not every used car sale qualifies for the margin scheme. Certain conditions have to be met before a vehicle can be sold this way. Which Vehicles Qualify as Second-Hand? HMRC defines a second-hand vehicle as one that has already been driven on the road, whether for business or personal use, and is fit for further use as it is or after minor repair. A car that has never been registered or driven does not count as second-hand, even if it has been sitting on a forecourt for months. Where Must the Car Have Been Bought From? To use the margin scheme, the car usually needs to have been bought from someone who could not reclaim VAT on it themselves. This typically includes: A private individual selling their own car A business that is not VAT registered Another dealer who also used the margin scheme when they sold it If a car was bought from a VAT-registered seller who charged VAT in the normal way, it usually cannot go through the margin scheme again. In that case, standard VAT rules apply on resale. Is the Margin Scheme Compulsory? No. The margin scheme is optional. A VAT-registered dealer can choose to charge standard VAT on the full selling price instead, if that works out better for their situation. Many dealers use the margin scheme because it usually results in less VAT being paid, but there is no legal requirement to use it for every sale. Do You Pay VAT When Buying a Used Car Privately? If you buy a used car directly from a private individual, there is no VAT charged at all. Private sales between individuals are outside the scope of VAT entirely, since the seller is not trading as a business. VAT only becomes relevant once a business or dealer is involved in the sale. If you are a sole trader or limited company buying a used car through a dealership, the dealer will either apply the margin scheme (with no VAT shown separately on the invoice) or charge standard VAT, depending on how they acquired the vehicle. Can You Reclaim VAT on a Used Car Bought for Business Use? Reclaiming VAT on a car purchase, whether new or used, is restricted for most businesses. If the car will be used for any private purposes, even occasionally, HMRC generally does not allow the VAT to be reclaimed. This applies even if the private use is small. There are limited exceptions. VAT can usually be reclaimed if the car is used exclusively for business, such as: A vehicle used only as a taxi, driving instructor car, or self-drive hire car A pool car with no private use at all, kept at business premises overnight Certain commercial vehicles, such as vans, that are not classed as cars for VAT purposes If you are self-employed or run a small business and are unsure whether your vehicle qualifies, it is worth getting advice before assuming you can reclaim the VAT, since HMRC checks this closely. How Do You Invoice a Sale Under the VAT