VAT on Second Hand Cars

Whether there is VAT on a car depends on how the seller bought it, not on the car itself. A new car always carries VAT at 20% on the full price. A used car that a dealer bought from a private seller is usually sold under the second-hand margin scheme, where the VAT is one-sixth of the dealer's margin and no VAT is shown on the invoice at all. A used car that the dealer bought on an invoice showing VAT separately is VAT-qualifying, and the resale carries 20% on the full price just like a new one.

That single fact explains almost every confusing thing about VAT on cars. Two identical 2021 hatchbacks on the same forecourt, at the same price, can produce two completely different invoices, because one came off a private driveway and the other came out of a leasing company's fleet. Neither invoice is wrong. They are describing two different tax histories.

VAT on new cars: 20%, always, on the full price

Start with the easy one, because it is the baseline everything else is measured against. VAT on new cars is the standard rate of 20%, charged on the full selling price of the vehicle. There is no scheme, no fraction and no special treatment. A new car has never been sold to a final consumer before, the manufacturer and the dealer both recovered the input tax as they moved it down the chain as stock in trade, and the 20% lands in full when it reaches the person who is going to drive it.

A dealer's unused stock in trade is one of the express exceptions to the input tax block on cars in article 7 of the Value Added Tax (Input Tax) Order 1992, which is why the chain works at all. The dealer is not blocked from recovering the VAT on a car sitting on the forecourt waiting to be sold, because that car is trading stock rather than a car the business is using.

Two things on a new car order form are not part of the VATable price and are worth separating out before you check the arithmetic. The first registration fee paid to the DVLA and the first-year rate of vehicle excise duty are not consideration for the supply of the car; they are statutory charges collected on the way through. Optional extras, delivery, paint protection and any dealer-fitted accessory are part of the supply and do carry VAT at 20%. A finance arrangement does not change the VAT on the car either. Whether the customer pays cash, takes hire purchase or signs a personal contract purchase, the VAT on the vehicle is charged on the price of the vehicle at the point it is supplied.

VAT on second hand cars: the three ways the same car can be sold

Here is where it stops being simple. A used car can reach a buyer under three different VAT treatments, and the dealer does not choose between them freely. The treatment is set by how the dealer acquired the vehicle.

1. The margin scheme car

The dealer bought the car without VAT. In practice that means from a private seller, from a business that was not VAT registered, or from another dealer who was also selling under the margin scheme. There was no VAT on the purchase invoice, so there was nothing to reclaim. When the dealer sells it, they account for VAT on the margin only, at one-sixth of that margin, and the invoice to the buyer shows a single price with no VAT on it.

2. The VAT-qualifying car

The dealer bought the car on an invoice that showed VAT separately. Ex-fleet, ex-lease, ex-rental and ex-driving-school cars are the usual sources, because those businesses were entitled to recover the VAT when they bought the car and therefore have to account for VAT when they sell it on. The dealer recovers the input tax on the purchase, then charges 20% on the full selling price when the car is sold. The margin scheme is expressly unavailable for any vehicle bought on an invoice showing VAT separately, so this is not an option the dealer can decline.

3. The private sale

An individual selling their own car is not making a taxable supply in the course of a business, so there is no VAT at all and no VAT invoice. This is the source that feeds the margin scheme, and it is the reason the scheme exists. Without it, a car that already bore 20% VAT when it was new would bear 20% again on its full value every time it passed through a dealer's hands.

The margin scheme: one-sixth of the margin, and what the invoice may not say

The second-hand margin scheme lets a dealer who bought a vehicle without VAT account for output tax on the margin, meaning the selling price less the purchase price, rather than on the full selling price. The VAT is one-sixth (16.67%) of that margin. HMRC's guidance on using the VAT margin scheme for second-hand vehicles puts it as plainly as that: multiply the gross margin by one-sixth.

One-sixth is not a concession or a reduced rate. It is the standard 20% rate expressed as a fraction of a VAT-inclusive amount. A £120 inclusive price contains £20 of VAT, and £20 is one-sixth of £120. The margin is treated as a VAT-inclusive figure, so one-sixth of it is the VAT inside it.

Three conditions sit around that arithmetic and they matter more than the arithmetic does.

• The purchase must have carried no VAT. The scheme is unavailable for any vehicle bought on an invoice that shows VAT separately. That vehicle is VAT-qualifying and must be sold standard-rated.
• The sales invoice must not show VAT separately. This is a rule of the scheme, not a formatting preference. A margin scheme invoice carries the vehicle details, the price and the required margin scheme reference, and it gives the buyer nothing to reclaim.
• The records must exist before the dealer needs them. More on this below, because it is where the scheme is actually lost.

The immediate consequence for a buyer is the one people ring their accountant about. You cannot reclaim input tax on a margin scheme purchase. Not because recovery was refused, but because no VAT was charged and none is shown. There is nothing there to recover. If you are trying to work out whether VAT on a car could ever be recovered, and on what terms, that is the input tax block in article 7 and it is a different question with its own answer; our guide to VAT on company cars covers the block, the exceptions and the recovery mechanics in full. This page goes only as far as explaining why the invoice in your hand has no VAT on it.

Why an invoice has no VAT on it: the boundary

Read this table as a diagnosis of the invoice rather than as a recovery guide. The left column is the world in which there is no VAT to recover, either because the margin scheme means none was charged or because the article 7 block means it cannot be credited. The right column is the world in which VAT was charged, shown, and is in principle recoverable.

No input tax recoverable (margin-scheme or blocked)	Input tax recoverable
A used-car dealer buys a 2019 hatchback from a private seller. No VAT on the purchase invoice, so there is nothing to reclaim, and the resale runs the margin scheme with no VAT shown.	The same dealer buys an ex-fleet car on an invoice showing VAT separately. The car is VAT-qualifying, the input tax is recoverable, and the resale carries 20% on the full price.
A driving school buys a car on a margin scheme invoice. No VAT is shown, so there is nothing to recover, even though driving instruction is a qualifying use.	A driving school buys the same model VAT-qualifying. Driving instruction is a qualifying use under article 7(2E), so the VAT that was actually charged is recoverable.
A taxi operator buys a car from a private seller under the margin scheme. The qualifying use does not conjure up VAT that was never charged.	A taxi operator buys a VAT-qualifying car for hire with a driver carrying passengers. VAT was charged, the block is lifted, and it is recoverable.
A garage buys a courtesy car that is available for the owner's weekend use. Availability for private use defeats the exclusive-business test in article 7(2G) outright, so the VAT on the invoice is blocked.	The same garage buys a diagnostic rig, or a van with a payload of one tonne or more. Neither is a car for VAT purposes, so the block does not apply and ordinary recovery rules run.
A dealer's demonstrator sold on under the margin scheme. Whatever the buyer intends to do with it, there is no VAT on the invoice to reclaim.	Unused stock in trade held by a manufacturer or dealer. The article 7(2) exception applies and the input tax is recoverable while the car is stock.

The pattern across the left column is worth naming. Two different mechanisms produce the same blank space on an invoice. Either no VAT was ever charged, which is the margin scheme, or VAT was charged but cannot be credited, which is the block. They look identical from the buyer's seat and they are completely different in law. The recovery mechanics belong to the company car page; what matters here is that the margin scheme answer is the first one, not the second.

One definitional point carried in that table is worth stating separately, because it decides whether any of this applies at all. A car for VAT purposes, as set out in VAT Notice 700/64, is a motor vehicle of a kind normally used on public roads with three or more wheels that is either constructed or adapted mainly for carrying passengers, or has roofed accommodation behind the driver's seat fitted with side windows. Vehicles with a payload of one tonne or more are outside that definition, as are vehicles carrying 12 or more people including the driver, vehicles of not less than three tonnes unladen, and special purpose vehicles such as recovery trucks, hearses and mobile shops. That is the VAT test, and only the VAT test. The benefit in kind classification of double-cab pickups is a separate question with a separate answer and the two must not be run together.

The stock book, and why the scheme is lost on paperwork

This is the part that matters most and it belongs at the front of any honest account of the margin scheme. The records are constitutive. They are not administration that follows a decision to use the scheme; they are the thing that makes the dealer entitled to use it. HMRC's guidance requires normal VAT records plus a stock book that tracks each item sold under the scheme individually, plus copies of purchase and sales invoices for everything in it. Where those records fail for a vehicle, the margin treatment fails for that vehicle, and VAT falls due at 20% on its full selling price.

That sentence is the whole risk in the trade, and it is worth sitting with. A dealer does not lose the margin scheme by being ineligible. Eligibility is usually obvious: the car came from a private seller, there was no VAT on the invoice, the scheme applies. The dealer loses it by not being able to prove, vehicle by vehicle, what was paid, what was received and which invoice belongs to which car. An inspection does not ask whether the business is the kind that can use the scheme. It picks vehicles out of the stock book and follows them both ways.

The stock book carries a unique stock number for every vehicle, cross-referenced to the purchase invoice and the sales invoice. Each entry records the purchase date and price and who the vehicle came from, the vehicle details including registration and mileage, then the sale date and price and the margin and VAT computed on that vehicle. The guidance on buying second-hand vehicles using a VAT margin scheme is blunt about the buying end: get a purchase invoice and enter the details in your stock book. The companion page on selling second-hand vehicles using a VAT margin scheme deals with the sales invoice and what it may and may not show.

Two practical failures produce most of the trouble. The first is the vehicle bought in a hurry with nothing but a handwritten note and a name, where the purchase invoice was never properly raised, so there is no evidence that the car was bought without VAT rather than off the books. The second is the sales invoice generated by a standard accounting package that helpfully breaks out VAT at 20%, which is exactly what a margin scheme invoice must not do. Either one converts a £300 VAT liability into a four-figure one on a single car.

If you sell vehicles regularly, the stock book is a trading system rather than a compliance chore, and it is the first thing to get right when setting up the books. Our guide to car dealership accounting covers how it sits alongside stock finance, consignment stock and the rest of the ledger.

Each margin stands alone

The second thing almost nobody explains is that the margin scheme is computed vehicle by vehicle and never in aggregate. There is no netting. A loss on one car does not reduce the VAT on another, and there is no such thing as a negative margin.

Where the selling price is at or below the purchase price, the margin for that vehicle is nil and the VAT on it is nil. That is the whole of the relief. No VAT credit arises, nothing carries forward, and nothing can be set against the profitable sale that happened the same week. Each vehicle's margin is computed on its own and the results are added together as a set of separate answers, not averaged.

This is not an obscure edge case. It is routine for a pitch to clear a slow-moving car below cost while making a good margin on the one that sold the same afternoon, and the instinct to think in terms of the week's gross profit is exactly the instinct the scheme does not share. A dealer whose VAT return reflects the trading position rather than the sum of the individual margins has understated the VAT.

Note also that global accounting is not available for vehicles. Global accounting is the margin scheme sub-scheme built for dealers in high-volume, low-value second-hand goods, letting them pool purchases against sales for a period instead of tracking each item. It exists, but it is closed to cars, whatever the car is worth. Vehicles are always accounted for individually.

Worked examples

A used-car pitch: the profitable sale

A dealer buys a car from a private seller for £6,000 and sells it for £7,800.

Selling price	£7,800
Purchase price	£6,000
Margin	£1,800
VAT at one-sixth of the margin	£300
Margin retained after VAT	£1,500

£7,800 less £6,000 is £1,800, and £1,800 divided by six is £300. The dealer accounts for that £300 as output tax on the VAT return and it comes out of the margin already made. The customer's invoice shows £7,800 and nothing else. No VAT line, no VAT amount, nothing to reclaim. For comparison, the same car sold standard-rated at the same forecourt price would carry £1,300 of VAT, which is one-sixth of £7,800. That gap of £1,000 on one vehicle is what the scheme is for.

The same pitch, the same week: the loss-making sale

The same dealer bought a second car for £5,000 and, after it sat unsold for two months, let it go for £4,600.

Selling price	£4,600
Purchase price	£5,000
Margin	Nil (no negative margin)
VAT	Nil

The margin is treated as nil rather than as minus £400. No VAT is due on that sale and no VAT credit arises from it. And it cannot be set against the first car. The dealer's VAT on these two vehicles is £300, full stop. It is not £233, which is what one-sixth of a netted £1,400 would be, and it is not reduced by any part of the £400 commercial loss. That loss is a real loss in the accounts and it reduces the profit chargeable to tax. It does nothing at all to the VAT.

The full range of awkward cases, including part exchanges, cars bought at auction, repairs and preparation costs, and vehicles that move between the two treatments, is worked through on our margin scheme calculation page.

What a private buyer actually pays

If you are buying a used car for yourself, the practical position is short. The price on the windscreen is the price. Under the margin scheme you are not being charged VAT as a separate amount, the dealer is not adding anything on top at the desk, and there is nothing on your invoice to reclaim because you are not registered for VAT and no VAT was shown anyway.

There is one thing worth checking, and it only matters if you are buying through a business. If you are a VAT-registered business and you have a reason to think you could recover VAT on a car, the vehicle has to be VAT-qualifying before the question even arises, and you need an invoice showing VAT separately. Ask before you commit, because the answer is set by the car's history and cannot be changed afterwards. Once a car is sold under the margin scheme it stops being VAT-qualifying permanently; the VAT that was in it has gone. Whether you could then recover that VAT is a separate question governed by the article 7 block, and the company car guide answers it.

The same logic applies to the sibling questions. An electric car is still a car for VAT, with no special purchase treatment, and the charging rules are their own topic, covered in our guide to VAT on electric cars. A leased car is not bought at all, and the 50% restriction on the lease charge is dealt with in VAT on leased cars.

What people get wrong

These are the errors that actually cost money, in rough order of how often they turn up.

Netting the good months against the bad ones

Already covered above, and still the most expensive routine mistake in the trade. Every margin is computed on its own vehicle. A VAT return built off the gross profit figure in the management accounts will be wrong every time there is a loss-making sale in the period.

Letting the accounting software show VAT on a margin scheme invoice

Off-the-shelf packages default to itemising VAT, because that is what almost every other business wants. On a margin scheme sale it breaks a condition of the scheme and hands the buyer a document suggesting they can recover VAT that was never accounted for. The invoice template for margin scheme sales has to be set up separately and checked.

Assuming the scheme covers the whole transaction

The margin is the selling price of the vehicle less the purchase price of that vehicle. Money spent preparing the car does not reduce the margin, and charges billed alongside the vehicle can be separate supplies in their own right. Anything sold as a standard-rated supply next to a margin scheme car needs treating as what it is.

Treating "VAT-qualifying" as a property of the model

It is a property of the individual vehicle's invoice history. Two cars off the same production line, sitting side by side, can differ. The registration document does not record it and the only reliable evidence is the purchase invoice.

Buying a "cheaper" car that turns out to be margin scheme

A VAT-registered buyer comparing a £24,000 VAT-qualifying car against a £23,500 margin scheme car is not comparing like with like, if they are actually entitled to recover. The VAT-qualifying car may be the cheaper one net of recovery. Whether recovery is available is the article 7 question, and it must be settled before the comparison is worth making rather than after.

Applying the one-tonne payload line to the benefit in kind

The payload test decides whether something is a car for VAT. It does not decide how a vehicle is taxed as an employee benefit. The two regimes use different definitions and have moved apart, and a vehicle can be outside the VAT car definition while still producing a company car charge.

Expecting a model-by-model answer

There is a test, not a list. Whether a specific vehicle is a car for VAT is decided by applying the Notice 700/64 definition to its actual construction and payload, which is why HMRC publishes a test rather than a catalogue.

Motor finance and redress

Separately from VAT, litigation and regulatory work on motor finance commission redress has been running and its status changes over time; the FCA's own page on car finance complaints is the place to check the current position. That has nothing to do with the VAT treatment of the vehicle and nothing on this page should be read as advice about it.

Where to go next

• VAT margin scheme for used cars: the calculation, line by line, for the full arithmetic, the exclusions and the stock book in detail.
• VAT on company cars, for the input tax block, the exceptions and every reclaim question.
• VAT on electric cars, for purchase and charging.
• VAT on leased cars, for the 50% restriction on lease charges.
• Car dealership accounting and choosing an accountant for a car dealership, for the wider trade position.

HMRC's live guidance on the scheme sits across three pages: using the VAT margin scheme for second-hand vehicles, buying second-hand vehicles using a VAT margin scheme and selling second-hand vehicles using a VAT margin scheme. The definition of a car and the motoring expenses rules are in VAT Notice 700/64, and the input tax block itself is article 7 of the Value Added Tax (Input Tax) Order 1992.