This guide summarises HMRC's guidance on using the VAT margin scheme for second-hand vehicles as published on gov.uk and read on 22 October 2026. It is general information, not tax advice; your accountant signs off your return.
How is the VAT worked out?
Take the purchase price away from the selling price to get the gross margin, then multiply the margin by one sixth. That fraction is the VAT at 20% already contained in the margin. If the margin is nil or negative there is no VAT to pay on that car, and the loss cannot be set against the margin on another car.
| Bought from a private seller | £5,000 |
|---|---|
| Prep, MOT and valet (not part of the purchase price) | £350 |
| Sold to a customer | £7,000 |
| Margin (selling price minus purchase price) | £2,000 |
| VAT due (margin divided by 6) | £333.33 |
| Profit after VAT and prep | £1,316.67 |
Note what counts. The purchase price is what you paid for the car; repairs, refurbishment, accessories and overheads are not added to it. The selling price includes directly linked incidental costs you charged the customer, such as an MOT or accessories fitted before sale, but not disbursements such as road tax you paid on their behalf.
Which cars can go through the margin scheme?
Cars you bought without being charged VAT: typically from a private individual, from another dealer on a margin scheme invoice, or from a business that could not reclaim VAT on it. Cars that cannot go through the scheme include new vehicles, imported vehicles, vehicles bought on an invoice showing VAT, Category A or B write-offs, and any vehicle on which you reclaimed or could have reclaimed VAT. Those are sold under the normal rules with VAT on the full price (in the trade, "VAT qualifying").
What records does HMRC require?
A stock book tracking each car individually: a stock number, the date and details of purchase, the seller, the purchase price, the date and details of sale, the buyer, the selling price, the margin and the VAT due. Keep the purchase and sales invoices for every car. There are extra entries for cars held on sale or return and for cars bought in a foreign currency, which must be recorded in sterling. Without the stock book you lose the right to use the scheme on that car and pay VAT on the full price.
What must the sales invoice show, and what must it not?
A margin scheme invoice shows the price but no separate VAT amount, because the customer cannot reclaim it. HMRC asks for a statement that the sale is under the margin scheme (the usual wording is "Margin scheme, second-hand goods" with a reference to the notice). Showing VAT separately on the invoice takes the car out of the scheme. Purchase invoices from other dealers should carry the same statement; if a purchase invoice shows VAT, that car cannot be sold under the scheme.
What goes on the VAT return?
The VAT due on margins goes in box 1 with your other output tax. The full selling prices of margin cars go in box 6 and their purchase prices in box 7; no input tax is claimed on them in box 4. VAT-qualifying cars are dealt with in the normal way. Many dealers run both kinds of stock, so the system that produces the invoices needs to know which is which for every car.
How does DealerSoftware handle it?
Each car carries a VAT status (margin, VAT qualifying, plus VAT or no VAT) and its purchase price. A margin sale produces an invoice with no VAT line and the scheme statement, the VAT page totals the margins and the boxes for the return, and reservation fees are receipted and set against the final invoice. The stock record is the stock book. Your accountant still checks the return, but the arithmetic is done for every car, every time. See the dealer management system page.