VAT on a Used Car: The Margin Scheme Calculation, Line by Line

Anwen runs a six-car pitch in Middlesbrough. She buys a 2019 hatchback from a private seller for £7,000 and sells it three weeks later for £8,500. The VAT she owes on that sale is £250. Not £1,416.67, which is what one-sixth of the £8,500 selling price would be, and not £1,700, which is what adding 20% on top would be. £250, because the margin scheme charges VAT on the margin and nothing else.

Selling price	£8,500
Purchase price	£7,000
Margin (selling price less purchase price)	£1,500
VAT at one-sixth of the margin	£250
Margin after VAT	£1,250

Every line re-derives with a calculator: £8,500 minus £7,000 is £1,500, and £1,500 divided by 6 is £250. That is the whole mechanic. The rest of this page is the paperwork that is the only thing keeping Anwen entitled to it, and the four situations where the £250 answer is wrong.

Why one-sixth, and why it is one-sixth of the margin

The standard rate of VAT is 20% (unchanged, and still current when this page was checked in August 2026). When you already know a VAT-inclusive figure and want the VAT inside it, 20% becomes one-sixth: a £120 inclusive price contains £20 of VAT, and £20 is one-sixth of £120. One-sixth is 16.67% when written as a percentage, which is why both figures appear in HMRC's guidance for the same thing.

The margin scheme applies that fraction to the margin rather than to the price. The rule sits in section 50A of the Value Added Tax Act 1994 and the VAT (Special Provisions) Order 1995, and the working guidance for vehicles is VAT Notice 718/1, with the general margin scheme rules in VAT Notice 718 and on the gov.uk VAT margin schemes page. The logic is that a car bought from a member of the public has already carried VAT once, when it was new, and the public seller cannot pass any of it on. Taxing the full resale price would charge VAT on the same value twice, so the scheme taxes only the value Anwen adds.

Two consequences follow, and they are the ones dealers get wrong. The margin is treated as VAT-inclusive, so you divide rather than multiply. And the VAT comes out of money Anwen has already made, rather than being collected on top of the price, which is why margin-scheme cars are advertised at one price with no VAT line.

The same car outside the scheme

Put the identical vehicle through the standard rules and the difference is not marginal.

Line	Margin scheme	Standard VAT, same forecourt price
Price to the buyer	£8,500	£8,500
Purchase price	£7,000	£7,000
VAT due to HMRC	£250 (£1,500 divided by 6)	£1,416.67 (£8,500 divided by 6)
Left after VAT and cost	£1,250	£83.33

The difference is £1,166.67 on one car. On a pitch turning over 120 cars a year at that kind of margin, the scheme is the difference between a business and a hobby, which is why the record-keeping that protects it is worth more attention than most dealers give it. (If Anwen tried to protect her margin by adding 20% on top instead, the car would need a £9,900 windscreen price to leave her in the same place, and at that price it competes badly against the pitch down the road.)

The records are the condition

Eligibility for the margin scheme is not something you apply for and hold. There is no registration, no election and no HMRC approval. What there is instead is a set of record conditions, and the scheme is lost vehicle by vehicle wherever those records do not stand up. In practice, dealers who lose the scheme lose it on paperwork, not because they were ineligible.

Three records have to exist for each car, per VAT Notice 718/1.

A purchase invoice. When Anwen buys from a private seller, she raises the purchase document herself and the seller signs it. It records the date, her name and address and the seller's name and address, the vehicle details including registration, make, model and mileage, the price paid, and the stock number she has just allocated. A signature on a slip of paper with a price is not enough on its own.

A sales invoice. Same stock number, the date, the buyer's name and address, the vehicle details and the total price, plus the margin scheme reference Notice 718/1 requires on the face of the document. What it must not carry is a VAT figure. More on that below.

A stock book. One row per vehicle, keyed on a unique stock number that ties the purchase invoice to the sales invoice. The row carries the purchase date and price, the seller, the vehicle details, then the sale date and price, the buyer, and the margin and VAT worked out on that vehicle. A spreadsheet is fine. What is not fine is reconstructing it from the bank statements in March.

The stock book is also the mechanism that makes the rest of the rules enforceable. Because the VAT is computed per row, there is nowhere in the system for the netting error described next to hide.

No VAT invoice goes to the buyer

A margin scheme sale carries no VAT invoice. Anwen sells at a single price, shows no VAT line, and issues nothing that would let a VAT-registered buyer reclaim input tax on the purchase. The VAT she pays HMRC is her cost out of her margin, not tax collected from the customer.

This matters commercially, not just administratively. A business buyer who needs to recover VAT cannot recover anything on a margin scheme car, so where Anwen sells to trade or to a company running the vehicle for business use, the buyer may prefer a VAT-qualifying car sold under the standard rules even at a higher headline price. Issuing a VAT invoice on a margin scheme sale to keep that buyer happy takes the vehicle out of the scheme, and Anwen then owes VAT on the full £8,500 having only priced for £250 of it.

A car sold at a loss

The following week Anwen buys an estate for £6,000, discovers a gearbox problem she cannot economically fix, and moves it on at £5,400.

Selling price	£5,400
Purchase price	£6,000
Margin	Nil (a negative margin is treated as nil)
VAT on this vehicle	£0

There is no VAT credit for the £600 she lost, and there is no negative margin to carry anywhere. The point that costs money is what happens next. Across the two cars, her VAT is £250 plus nil, which is £250. It is not one-sixth of a netted £900 margin, which would be £150. The £100 difference on two cars scales quickly across a quarter, and it is the single most common margin scheme error in the motor trade, usually made by a dealer who has built one sensible-looking spreadsheet totalling purchases and sales for the period.

Each margin stands alone. That is the rule that the per-vehicle stock book exists to enforce, and it is the reason the stock book cannot be replaced by a purchases total and a sales total.

When the margin scheme cannot be used

The scheme is available for eligible second-hand goods bought without VAT. For a car dealer that means, in the main, vehicles bought from private sellers and from traders who are not VAT registered. The situations where it is not available are worth knowing before the car is on the pitch, because the price you pay depends on which set of rules applies.

Cars bought on a VAT invoice. If the seller is VAT registered and issues a VAT invoice, that vehicle is outside the scheme. This is the ex-fleet, ex-lease and ex-daily-rental route, and those cars are usually described in the trade as VAT-qualifying. Worked through: Anwen buys an ex-fleet saloon for £9,600 including £1,600 of VAT, reclaims the £1,600 as input tax, and sells it for £12,000. Output VAT is £12,000 divided by 6, which is £2,000. She pays HMRC £2,000 and has already recovered £1,600, so the net VAT cost of that vehicle is £400. Her gross profit is £10,000 net of VAT received less £8,000 net cost, which is £2,000. The arithmetic works, but it only works if she knew at purchase that the car was VAT-qualifying and priced it that way. A dealer who buys a VAT-qualifying car and then sells it on margin scheme assumptions is short by the difference.

New vehicles and vehicles never used. The scheme is for second-hand goods. A vehicle that has not been used is not eligible.

Vehicles where the records fail. Covered above, and it is the failure mode that actually happens.

Global accounting. Global accounting is a sub-scheme for high-volume dealers in low-value second-hand goods: rather than tracking each item, they pool purchases and sales for the period and account on the pooled figure. Dealers hear about it and ask whether it would spare them the stock book. It would not, because vehicles are excluded from global accounting. Cars are accounted for individually, whatever their value, and the stock book stays.

Where the margin scheme sits alongside the rest of your VAT

The margin scheme is a way of computing output VAT on particular stock. It is not an alternative to registering, and it is not one of the VAT accounting schemes a business picks between at registration.

You must register for VAT once taxable turnover exceeds £90,000 in any rolling 12 months, or where you expect to exceed it in the next 30 days, and the deregistration threshold is £88,000 (both current from 1 April 2024 and still current when this page was checked in August 2026). For turnover purposes a margin scheme dealer counts the full selling price of the car, not the margin, so a pitch selling twelve £8,500 cars a year is already past the threshold on £102,000 of takings while its margins total a fraction of that. The threshold arrives earlier than dealers expect for exactly this reason.

Once registered, Making Tax Digital for VAT applies. It has applied to all VAT-registered businesses since April 2022, regardless of turnover, so digital records and MTD-compatible software for returns are not optional. The stock book sits behind that, feeding the margin figures into the return.

One clarification, because the names collide. The margin scheme is not the flat rate scheme, and the two do not sit well together: a dealer on the flat rate scheme applies the flat percentage to VAT-inclusive turnover, which for a margin scheme dealer means the full selling prices, and the result is usually worse than accounting normally on the margins. If you are weighing the general choice, our comparison of flat rate versus standard VAT covers it, and the VAT registration threshold page covers the timing of registration itself.

What sits either side of this page

The margin scheme is one part of a dealer's tax position. The wider question of what a motor trade business needs from an accountant, including how stock and stocking finance sit on the balance sheet, is covered on our page for car dealers and the motor trade. The operational side, following a single vehicle from part-exchange through demonstrator use to retail sale with the tax treatment at each step, is covered in car dealership accounting. The same margin scheme also runs on second-hand jewellery and antiques, with different exclusions and a different set of traps, and that is set out on our page for jewellers.

If you are running a pitch and are not confident that your stock book would survive a VAT visit, or you have been netting margins across vehicles, both are fixable and both are cheaper to fix before HMRC asks. Get in touch and we will look at the records you have rather than the ones you should have.