VAT Margin Scheme Explained (Without the Headache)
If you sell second-hand cars in the UK, the VAT Margin Scheme can save you from charging VAT on the full selling price. Instead, you pay VAT on your profit margin only — but only if you calculate it the way HMRC expects.
This guide explains it in simple terms and clears up the biggest confusion: what counts as the "purchase price."
What is the VAT Margin Scheme?
Normally, VAT-registered businesses charge VAT on the full selling price. With second-hand cars, that can be unfair — because many cars are bought from private sellers or other margin traders where there was no VAT to reclaim.
So the margin scheme lets you account for VAT on just the margin:
Margin = Selling price − Purchase price (of the vehicle)
Then VAT due is calculated from that margin (because the margin is treated as VAT-inclusive).
The Most Important Rule: What is "Purchase Price"?
For margin scheme VAT, the purchase price is only what you paid for the car itself.
Think:
- Hammer price at auction, or
- Amount paid to the seller (private purchase / non-VAT invoice), or
- The price shown for the vehicle on the invoice.
What Does NOT Count as Purchase Price?
These do not reduce your margin for VAT purposes:
- Auction fees / buyer's premium
- Assured / essential / condition check fees
- Delivery / transport / storage
- Repairs, servicing, MOT, valeting, prep
- Advertising / photography / admin overheads
These are business costs and are handled separately under normal VAT rules.
How Do You Calculate VAT on the Margin?
If your margin is positive:
VAT due = Margin ÷ 6
Example:
- Buy car for £5,000
- Sell for £6,000
- Margin = £1,000
- VAT due = £1,000 ÷ 6 = £166.67
If the margin is zero or negative, the VAT due is £0 (you don't get a VAT credit for a loss on that car).
What About VAT on Auction Fees, Delivery, Prep and Repairs?
This is where being VAT registered matters.
If you are VAT registered: If the fee/prep invoice includes VAT and you've got a proper VAT invoice, you can usually reclaim the VAT as input VAT in the normal way.
Example:
- Prep & fees: £87 (including 20% VAT)
- VAT inside that is £87 ÷ 6 = £14.50 reclaimable
Key Warning: Don't Double Dip
You must not:
- Reduce your margin by adding those costs to the purchase price AND
- Reclaim the VAT on them.
It's either treated as part of the margin (it generally isn't), or treated as a vatable service cost (it generally is). The compliant approach is: margin is sale minus vehicle purchase only, and costs are handled separately.
Worked Example (The One Dealers Actually Care About)
Buy car: £5,000 | Sell car: £6,000 | Prep/fees: £87 (20% VAT invoice)
1) Margin scheme VAT
- Margin = £6,000 − £5,000 = £1,000
- VAT due on margin = £1,000 ÷ 6 = £166.67
2) VAT reclaimed on costs (VAT registered only)
- VAT in £87 = £14.50 reclaimable
3) Net VAT paid
- Net VAT to HMRC = £166.67 − £14.50 = £152.17
4) Real profit
- Total costs = £5,000 + £87 = £5,087
- Gross profit before VAT = £6,000 − £5,087 = £913
- Net profit after VAT = £913 − £152.17 = £760.83
Quick Checklist for Dealers
- Use the margin scheme only on eligible vehicles and keep proper stock records.
- Purchase price for margin = vehicle only (hammer/price paid).
- VAT due = margin ÷ 6 (if margin is positive).
- Costs like fees/delivery/prep are separate.
- If VAT registered and you have VAT invoices, reclaim VAT on those costs normally.
- Don't add fees/prep into purchase price and also reclaim VAT on them.