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.
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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 Margin Scheme?
Invoices under the margin scheme look different from a standard VAT invoice. HMRC requires that the invoice does not show a separate VAT amount. Instead, the invoice must include wording confirming the sale falls under the margin scheme, such as a note stating “Margin Scheme – Second-Hand Goods.”
This matters because a buyer cannot reclaim VAT on a margin scheme purchase, since no VAT figure is shown. If you are buying a car for business use and plan to reclaim VAT, always check whether the invoice is a margin scheme invoice or a standard VAT invoice before completing the purchase.
What Records Do You Need to Keep for VAT on Used Cars?
If you sell used cars under the margin scheme, HMRC expects detailed records to be kept for at least six years. This is often referred to as a stock book, and it should include, for each vehicle:
- The purchase date and price
- Details of who the car was bought from
- The sale date and selling price
- The buyer’s details
- The margin and VAT calculated on that margin
Poor record-keeping is one of the most common reasons HMRC challenges margin scheme claims during a VAT inspection. If your records cannot show how a margin was worked out, HMRC can treat the sale as if VAT were due on the full selling price instead, which can lead to a larger and unexpected VAT bill.
Does VAT on Used Cars Apply to Cars Bought at Auction?
Yes, cars bought at auction can also fall under the margin scheme, but the way fees are charged makes a difference. Some auction houses charge a buyer’s premium that is treated as VAT inclusive, while others charge VAT separately on their fee.
If VAT is charged separately on the auction fee, that VAT can usually be reclaimed on its own, but it is not counted as part of the car’s purchase price for margin scheme purposes. If the fee is VAT inclusive, it gets added to the purchase price of the vehicle instead. Getting this wrong is a common error, so it is worth checking the invoice from the auction house carefully.
Do You Need to Register for VAT to Sell Used Cars?
You only need to register for VAT once your taxable turnover goes over the current threshold, which is £90,000 in a rolling 12-month period. If your turnover is below this, you can choose to register voluntarily, but you are not required to.
If you are not VAT registered, none of this applies to you in the same way, since VAT is only something registered businesses charge and account for. However, if you are approaching the threshold or considering voluntary registration to reclaim VAT on other costs, it is worth working out in advance how the margin scheme would affect your specific business, since it is not automatic and needs to be applied correctly from the start.
What Happens if a Used Car Is Sold for Parts or Scrap?
If a car taken in part-exchange is sold for usable parts or scrapped rather than sold on as a whole vehicle, it cannot be treated under the margin scheme. In this case, VAT is due on the full selling price of any parts sold, not on a margin. This catches some dealers out, especially when a part-exchange vehicle turns out to be uneconomical to repair and is broken down instead of resold whole. If you regularly take part-exchange vehicles, it is worth keeping a clear record of which ones are resold as complete cars and which are broken up, since the VAT treatment is not the same.
What are Common Mistakes Business Owners Make With VAT on Used Cars?
Most errors around VAT on used cars come down to a handful of recurring issues, rather than anything complicated. Being aware of these can save a lot of time if HMRC ever asks questions.
- Assuming all used cars qualify for the margin scheme. A car bought from a VAT-registered seller who charged standard VAT usually cannot be resold under the margin scheme.
- Mixing up the margin with profit. The margin is based purely on purchase price versus selling price. Costs like repairs, cleaning, or added accessories reduce actual profit but do not reduce the VAT margin.
- Incomplete stock book records. Missing a purchase date, seller detail, or sale price can be enough for HMRC to disallow the margin scheme treatment on that vehicle.
- Trying to reclaim VAT on a margin scheme purchase. Since no VAT is shown separately on these invoices, there is nothing to reclaim, even if the buyer is VAT registered.
- Treating auction fees the same way every time. Whether a buyer’s premium is VAT inclusive or has VAT charged separately changes how it affects the purchase price.
FAQs About VAT on Used Cars
Does every used car sale involve VAT?
No. Private sales between individuals are outside the scope of VAT entirely. VAT only comes into play once a VAT-registered business or dealer is involved in the sale.
Is the VAT rate on used cars different from new cars?
The standard VAT rate itself is the same. What differs is what the VAT is charged on. New cars are usually charged VAT on the full price, while used cars sold under the margin scheme are only charged VAT on the profit margin.
Can a sole trader use the VAT margin scheme?
Yes, as long as the sole trader is VAT registered and the vehicle and purchase conditions meet the scheme’s requirements. The margin scheme is not limited to larger dealerships.
What happens if HMRC finds an error in a margin scheme calculation?
If HMRC decides that the record-keeping does not support the margin claimed, they can assess VAT as though it were due on the full selling price of the vehicle, rather than just the margin. This can result in a significantly higher VAT bill than expected, along with possible penalties depending on the circumstances.
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Getting VAT on Used Cars Right
VAT on used cars is one of those areas that looks straightforward on the surface but causes real problems when the details are missed. A wrong invoice, a missing stock book entry, or an assumption about what counts as second-hand can all lead to HMRC queries later, sometimes months or years after the sale has already happened.
If you buy or sell used vehicles as part of your business, whether that is a handful of cars a year or a full dealership, it is worth having your VAT treatment checked properly rather than guessing. At Micro Entity Accounts, we help business owners and self-employed traders across the UK work out exactly how VAT applies to their vehicle sales and purchases, set up proper record-keeping from the start, and avoid the common mistakes that lead to unexpected VAT bills. Get in touch with our team to talk through your situation and make sure your VAT is being handled correctly.
If you want to read more articles about VAT, you can go through our guides:
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