Margin Scheme (VAT)
The VAT Margin Scheme lets UK used-car dealers charge VAT only on the profit margin of a sale, not the full selling price — provided the vehicle was bought from someone not registered for VAT or a margin-scheme seller.
Under normal VAT rules a dealer would charge 20% VAT on the full retail price of a car, making used stock uncompetitive against private sellers. HMRC's Margin Scheme closes that gap: the dealer pays VAT only on the difference between what they paid and what they sold for. Almost all ordinary used-car sales between UK dealers and consumers run on the Margin Scheme.
How the VAT is calculated
- Purchase price: £10,000 (bought from a private seller, non-VATable).
- Sale price: £12,000.
- Gross margin: £2,000.
- VAT due: £2,000 × 1/6 = £333.33.
- Net margin after VAT: £1,666.67.
When you can't use the Margin Scheme
If you buy a car from a VAT-registered business that invoiced you with VAT (e.g. an ex-fleet car with a full VAT invoice), that vehicle is sold under standard VAT rules — you reclaim the input VAT on purchase and charge VAT on the full sale price. These are usually flagged as 'VAT Qualifying' in trade listings.
Record-keeping requirements
HMRC requires a stockbook showing purchase price, sale price, and margin per vehicle, plus paired purchase and sale invoices. Getting the scheme wrong — or mixing Margin and standard-VAT stock — is one of the most common VAT-inspection findings in the motor trade.
Related terms
VAT Qualifying
A VAT Qualifying vehicle is one where the seller holds a valid VAT invoice for the car, meaning VAT can be reclaimed on purchase and charged on resale — typically ex-fleet, ex-demo, or ex-lease stock.
Trade Price
Trade price is the price a vehicle changes hands at between two dealers — significantly below retail, without VAT on the margin (when sold Margin Scheme) and without retail preparation or warranty built in.
Put the terms to work
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