VAT margin scheme for cars: a worked example

If you are VAT-registered and you resell a Cat N or Cat S car, the VAT margin scheme can cut your VAT bill. You pay VAT on the gap between purchase price and sale price, at one-sixth of that gap, instead of on the full selling price. It only works if the purchase was eligible, so check the lot terms and the auctioneer's catalogue before you bid, and the invoice when it arrives.

This guide covers cars bought at auction and resold. It is not tax advice. HMRC's rules have conditions, and your accountant or HMRC should confirm how they apply to you.

Who this applies to

The scheme is for VAT accounting. If you are not VAT-registered and you sell your own car, HMRC says the private sale of goods that are not business assets is usually outside the scope of VAT. If you are VAT-registered and buy cars to resell, check whether the scheme fits. GOV.UK says you must register for VAT if your taxable turnover over the last 12 months goes over £90,000, or you expect it to in the next 30 days. See GOV.UK on registering for VAT.

What the scheme does

HMRC's guidance on using the VAT margin scheme for second-hand vehicles sets out the sum:

1. Work out the purchase price and the selling price.
2. Subtract the purchase price from the selling price to get the gross margin.
3. Multiply the gross margin by 1/6.

The VAT is due on the difference between what you paid and what you sold for, not on your overall profit. The purchase price does not include repairs, refurbishment, accessories or overheads. The selling price includes things directly tied to the sale, such as an MOT you paid for to make the car saleable, and accessories fitted before the sale.

Which write-off cars qualify

HMRC says a vehicle is second-hand when it has been driven on the road or is suitable for further use. The scheme is not available for:

• Category A and B write-offs, or vehicles subject to the End of Life Directive
• new vehicles and vehicles imported into the UK
• any vehicle bought on an invoice that shows VAT separately
• vehicles where you reclaimed, or could have reclaimed, VAT on the purchase

Cat S and Cat N are not on that list, so a repairable write-off can qualify. Our Cat S vs Cat N guide explains why Cat A and B are not flips anyway.

One more trap for rebuilders. If you build a car from used parts and DVLA gives it a new registration number, HMRC says you cannot use the scheme and must account for VAT on the full selling price. HMRC allows a rebuild that is not re-registered, if the other conditions are met.

Buying at auction: read the invoice

HMRC's guidance on buying second-hand vehicles under the scheme is specific about auctions:

• You must check the vehicle is eligible for onward sale under the scheme. The auctioneer's sales catalogue should say.
• If the auctioneer charges VAT separately on the hammer price, you cannot use the scheme for the onward sale.
• Your purchase price is the hammer price plus charges for services, such as buyer's premium, where those charges do not show VAT separately.
• If the auctioneer bills other services and charges VAT separately on them, you can reclaim that VAT under the normal rules. You must not add those charges to your margin scheme purchase price.
• An indemnity fee, if charged, stays out of the purchase price.
• If you buy a vehicle as a result of an insurance claim, HMRC says you will not be charged VAT when it is sold on to you in the same state and the insurer got it from someone who would not have charged VAT, such as a private individual. You can resell it under the scheme if it is eligible.

The details depend on how your own invoice is laid out. Our buyer fees guide includes 20% VAT on Copart UK's fees in its totals. Whether the hammer price on a given lot carries VAT is something only the invoice and the lot terms tell you. Do not assume it, and ask your accountant how to treat each line.

Worked example

These numbers are an illustration, not a quote. Assume the invoice shows no VAT on the hammer price, you are VAT-registered, the car is a Cat N that stays on its registration, and the £6,000 sale price is the full amount the buyer pays. Input VAT on repairs is left out.

If the car had not qualified, VAT would be due on the full selling price. Treating £6,000 as a VAT-inclusive price, the VAT in it at the 20% standard rate is £1,000, which is one-sixth. The headline difference is £333.33, before any input VAT you could reclaim under normal accounting, which would narrow the gap.

Notice that your repair spend of £1,800 does not reduce the margin, so a repair-heavy flip pays VAT on a margin that overstates the true profit. Check HMRC's invoice rules before you issue a sales invoice.

What this means for your max bid

VAT can change your sums in two places, and each depends on your invoice.

• Fees that show VAT separately: HMRC says you can reclaim that VAT under the normal rules and must keep it out of your margin purchase price. Your real fee cost is then below the VAT-inclusive figure.
• VAT on the sale: under the scheme you owe VAT on the margin, not the full price, which lifts your net profit.

Our fee totals include 20% VAT on fees. If you are VAT-registered, adjust your own profit sum for the two points above, so you do not double-count. Work it out once with your accountant, then apply the same treatment to every lot.

Records HMRC expects

If you are in the business of buying and selling cars, HMRC says to keep a stock book that tracks each vehicle individually, plus copies of the purchase and sales invoices. If you only sell the odd car, HMRC allows lighter record-keeping provided you meet the other conditions and hold evidence of the purchase and selling price.

Checklist before you bid

• Are you VAT-registered? If not, stop here.
• Is the car Cat S or Cat N, with no VAT shown on the hammer price?
• Is the car already registered in the UK, not imported?
• Do you plan to repair it and keep its registration?
• Have you asked your accountant how to treat each line on the auction invoice?