Greg runs an independent forecourt in Warrington with about forty cars on the pitch and two ramps behind it. In March a customer buys a saloon from him and part-exchanges a 2021 estate with 48,000 miles on it. That estate is the vehicle followed below, from the moment it is valued on the forecourt to the moment the money from its sale is taxed. Four hops, four different pieces of the accounts, and the figures at each one are the numbers that decide what a dealership actually earns.
Hop one: the estate arrives as a part-exchange
The saloon is priced at £11,500. Greg values the estate at £4,000 in trade, but the customer will not move, so he allows £4,500 and takes £7,000 in cash and finance to complete.
Two transactions have happened, not one. The saloon has been sold for £11,500, and the part-exchange allowance is part of what Greg received for it, not a discount off it. Separately, Greg has bought the estate for £4,500. That figure, not the £4,000 he thinks it is worth, is now the vehicle's purchase price on the books and in the stock record.
This is where over-allowing does its damage, and it is quiet damage because it lands on a different car and in a later month. Allowing the extra £500 did not reduce the VAT on the saloon by a penny, because the saloon still sold for £11,500. What it did was raise the estate's cost by £500, which will reduce the estate's margin by £500 when it sells. The VAT on that smaller margin falls too, so the real cost is not the full £500: it is £416.67, with £83.33 of the difference coming back through less VAT. Greg gave away £416.67 of profit to close a deal, and it will not show up until the estate is gone.
Hop two: what the stocking facility does to the numbers
Greg funds his pitch through a stocking facility, so the estate is drawn down at its £4,500 purchase price on the day it arrives. It sells 90 days later. His facility runs at 9.5% a year, so the interest on this vehicle is:
£4,500 × 9.5% × 90 ÷ 365 = £105.41
Three points about that £105.41, and they are the ones dealers get wrong most often in their own bookkeeping.
The vehicle stays Greg's stock throughout. A stocking facility funds the purchase; it does not change who owns the car for accounting purposes, so the estate sits in current assets at cost from the day it arrives until the day it is invoiced out, and the drawdown sits as a liability alongside it. The two are not netted off.
The interest is a finance cost, deducted against trading profit in the period it accrues. It is not part of what Greg paid for the estate, so it does not increase the £4,500 purchase figure. That distinction is the one that catches people: the interest reduces taxable profit, but it never reduces the VAT on the sale.
And because the interest accrues per day per vehicle, it is a real measure of how much a slow-moving car is costing you. A unit that sits for 240 days rather than 90 costs Greg £281.10 in interest on the same £4,500 (£4,500 × 9.5% × 240 ÷ 365), which is most of a small car's gross margin gone before anything else has happened to it. Ageing your stock by days on the pitch, and putting the accrued interest against each line, turns that from a feeling into a figure.
Hop three: three months on the demonstrator fleet
The estate is clean and it drives well, so before he retails it Greg puts it on the demo fleet for three months. That decision changes nothing about its balance sheet position, provided the car genuinely remains available for sale. It is still stock in trade, still carried as a current asset at cost, still funded on the facility.
What it can change is the employment tax position. If Greg or a member of staff uses the estate privately, and not simply for demonstration runs and deliveries, that private use is a taxable benefit in kind on the person driving it, and the company pays Class 1A National Insurance on the same cash equivalent at 15%, the employer rate in force from 6 April 2025. On a car with a cash equivalent of £3,150 for the year, that is £472.50 of Class 1A for the company, on top of the income tax the driver pays. Sitting outside the vehicle's own profit and loss, it is a cost of the demo policy rather than a cost of the car. How the cash equivalent itself is worked out, and what goes on the P11D, belongs to our P11D company car and fuel page, and the wider relief position for a company-owned car is covered in our limited company car tax relief page.
There is a second question that only arises where the vehicle carried recoverable VAT in the first place, which this one does not, because it came from a private customer with no VAT invoice. Where a dealer buys a VAT-qualifying car and wants to recover the input tax, VAT Notice 700/64 sets the conditions, and availability for private use is where most demonstrators fail. Decide who is driving before you decide how to treat it.
Why a demonstrator gets no capital allowances while it stays stock
Stock in trade does not attract capital allowances. Nothing about demonstrator use changes that, so for the three months the estate spends on the demo fleet there is no allowance to claim and no pool to put it in.
The position only changes if a car is taken permanently out of the sale pool and allocated to someone, at which point it stops being stock and becomes a fixed asset. Cars are excluded from the Annual Investment Allowance (AIA) and from the first-year allowances (FYAs), so relief then comes through writing down allowances (WDAs) set by CO2 emissions: the main rate of 18%, falling to 14% from 1 April 2026 for companies and 6 April 2026 for unincorporated businesses, or 6% in the special rate pool. New zero-emission cars are the exception, carrying a 100% first-year allowance. Those rules, the CO2 boundaries, the private-use restriction and the balancing adjustment when the car is sold, are all set out in full on our writing down allowance on cars page, which is where to go if a vehicle has genuinely left your stock.
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Hop four: through the workshop, then out of the door
Before the estate is advertised it goes across a ramp: an MOT (the annual roadworthiness test), a service, and two tyres. Parts cost £180 plus £36 VAT, which Greg reclaims as normal input tax, and the in-house labour costs him £160 in wages and overhead. The vehicle's preparation cost is £340.
That £340 has a split personality, and understanding the split is most of what separates a correct set of dealer accounts from an incorrect one. For accounting purposes it is part of the cost of bringing the car to the condition in which it can be sold, so it forms part of the vehicle's stock cost. For VAT purposes it is not part of what Greg paid for the car, so it does not increase the purchase figure in the margin calculation. Same £340, two different homes.
The estate is advertised at £6,295 and sells at the asking price. The margin is £6,295 less the £4,500 purchase price, which is £1,795, and the VAT due under the second-hand margin scheme is one sixth of it, £299.17. The scheme's mechanics, the stock book that makes it valid and the reason a failed record loses the scheme vehicle by vehicle rather than in general are set out on our VAT margin scheme for used cars page, and the conditions are in VAT Notice 718/1.
The whole vehicle on one page
| Line | Amount | Where it goes |
|---|---|---|
| Sale price | £6,295.00 | Turnover |
| Less purchase price (the part-exchange allowance) | (£4,500.00) | Cost of sales |
| Margin | £1,795.00 | The VAT base |
| Less VAT at one sixth of the margin | (£299.17) | Output tax on the VAT return |
| Margin after VAT | £1,495.83 | |
| Less preparation and reconditioning | (£340.00) | Cost of sales, not the VAT base |
| Less stocking interest, 90 days | (£105.41) | Finance costs, not the VAT base |
| Profit on the vehicle | £1,050.42 | |
| Corporation tax at 19% (small profits rate, profits under £50,000, financial year 2026) | (£199.58) | |
| Retained after tax | £850.84 |
Now go back to hop one. Had Greg held his valuation at £4,000, the margin would have been £2,295, the VAT £382.50 and the margin after VAT £1,912.50, which is £416.67 more than he actually made. Every other line in the table would have been identical. The £500 he conceded on the forecourt in March cost him £416.67 in June, on a different car, in a different month, and nothing in his day-to-day paperwork connected the two.
Greg trades through a limited company, so the profit meets corporation tax at 19% while his augmented profits stay below £50,000, with marginal relief applying between £50,000 and £250,000 and the main rate of 25% above that. A dealer trading as a sole trader instead pays income tax at their marginal rate plus Class 4 National Insurance at 6% on profits between £12,570 and £50,270 and 2% above, the 2025/26 figures, still current when this page was checked in August 2026.
The workshop is a different VAT animal from the forecourt
The two ramps behind Greg's pitch are a services business, and they do not follow the vehicle-sales rules at all. Customer servicing, repairs, diagnostics and parts are standard rated at 20% in the ordinary way, with input tax recoverable on the parts and consumables bought in. There is no margin scheme anywhere on that side of the business, and treating a repair invoice as though there were is one of the more common errors in dealer bookkeeping.
MOT fees have their own treatment. Where the test fee is passed on to the customer at no more than the statutory maximum, it can be treated as a disbursement outside the scope of VAT, which is the arrangement described in VAT Notice 700/57. Charge above the statutory maximum, or bundle the test into a priced package, and that treatment stops applying to the excess.
For registration purposes the two sides add together, and vehicle sales count at their full selling price rather than at the margin. With the registration threshold at £90,000 of taxable turnover in any rolling 12 months and deregistration at £88,000, a forecourt selling even a modest number of cars is past the threshold before the workshop is counted at all. Keeping the workshop's takings in a separate nominal code is not a compliance requirement, but it is the only practical way to see which half of the business is actually making money.
Valuing the stock that has not sold by your year end
Suppose the estate had not sold in June and was still on the pitch at Greg's 31 December year end. It would be carried at the lower of cost and net realisable value, tested vehicle by vehicle rather than across the pitch as a whole.
Cost here is the £4,500 purchase price plus the £340 of preparation, giving £4,840. Net realisable value is what Greg now expects to get, less what it will cost him to get there: if the car is now advertised at £5,200 and he expects around £250 of further advertising, valeting and warranty cost, that is £4,950. Cost is the lower figure, so the estate stays on at £4,840. Reduce the advertised price to £4,900, though, and net realisable value drops to £4,650, and the vehicle has to be written down by £190. That write-down is a deduction against trading profit in the year it happens, not a problem deferred to the year the car finally sells.
The vehicles worth checking at every year end are the aged ones, because that is where cost quietly overtakes value. A stock report ordered by days on the pitch, with accrued stocking interest against each line, tells you which cars to look at before your accountant asks.
What to give your accountant
Most dealer accounts go wrong in the same three places, and all three are fixed by paperwork rather than by tax planning. Keep the stock book per vehicle, with purchase and sale entries and the stock number, because the margin scheme stands or falls on it. Record part-exchanges as two transactions on the day, with the allowance figure stated, so the second vehicle enters stock at the right cost. And keep the workshop's income and costs in their own codes, so the standard-rated side of the business is never mixed into the vehicle side.
If you want a broader view of how a dealership's accounts fit together, from stock and facility balances through to the trading account, start with our accountant for car dealers page. If your stock book is the thing keeping you awake, the margin scheme page above is the place to start instead. And if you would rather someone else took the whole lot off your desk, get in touch and we will look at a month of your actual paperwork before quoting anything.