Knowing which stock counts as VAT margin scheme cars decides whether a dealer charges VAT on the full selling price of a used vehicle or only on the difference between what it paid and what it sold for, and the answer depends almost entirely on how the vehicle was bought. HMRC withdrew VAT Notice 718/1 on 23 December 2021 and replaced it with a set of online guidance pages, but the underlying scheme works in the same way.
This explainer sets out which vehicles qualify, how the margin is calculated, the stock book and invoice records that HMRC treats as conditions of the scheme, and where commercial vehicles, ex-fleet stock and electric cars fit. It is written for dealer principals, finance teams and remarketing managers.
What replaced VAT Notice 718/1
The withdrawn Notice 718/1 publication page shows it was first published on 26 January 2016, last updated on 14 January 2021 and withdrawn on 23 December 2021. The ICAEW Tax Faculty reported that HMRC withdrew Notices 718, 718/1 and 718/2 on that date and issued new margin scheme documents that were primarily replacements, with added material on the Northern Ireland Protocol.
For vehicles, the main reference is now HMRC’s guidance on using the VAT margin scheme for second-hand vehicles, supported by separate pages on buying, selling and other products sold alongside a vehicle. The detailed stock book and invoice requirements sit in HMRC’s VAT tertiary legislation on margin schemes, which has the force of law.
Which VAT margin scheme cars qualify
HMRC treats a vehicle as second-hand if it has been driven on the road for business or pleasure, or is suitable for further use. Eligibility then turns on the purchase. According to HMRC’s guidance on buying second-hand vehicles, a dealer can use the scheme for vehicles bought from:
- private individuals;
- businesses that are not registered for VAT;
- dealers or businesses that could not reclaim the input VAT when they bought the vehicle;
- VAT-registered dealers selling under a margin scheme;
- Motability, where the invoice shows VAT charged at the zero rate.
The scheme cannot be used for new vehicles, imported vehicles, vehicles bought on an invoice showing VAT separately, Category A and B write-offs, vehicles already sold under the normal VAT rules, or vehicles on which the dealer reclaimed, or was entitled to reclaim, VAT. HMRC’s internal manual at VATMARG08300 states plainly that imported cars are not eligible for sale under the scheme. At auction, the purchase price is the hammer price plus service charges such as buyer’s premium, provided no VAT is shown separately; an indemnity fee is excluded.
How the margin and VAT are worked out
The calculation is short. The dealer takes the purchase price away from the selling price to find the gross margin, then multiplies that margin by one sixth to find the VAT due. HMRC stresses that VAT is due on the difference between buying and selling prices, not on the overall profit on the vehicle.
That distinction matters for preparation costs. The purchase price is everything paid for the vehicle but does not include repairs, refurbishment, accessories or overheads. The selling price includes everything received, including incidental costs tied to the sale such as an MOT needed to make the vehicle saleable, and accessories fitted before sale. Disbursements are accounted for separately, outside the scheme. HMRC’s manual at VATMARG02300 confirms that VAT on repairs, parts and overheads can be reclaimed under the normal rules, but those costs must not be added to the purchase price.
For example, a dealer that buys a car privately and fits new tyres before sale still calculates VAT on the gap between purchase and selling price; the tyres do not reduce it. Each vehicle is accounted for individually in the stock book. HMRC’s global accounting guidance, which pools margins across a period, excludes motor vehicles and motorcycles except those broken up for scrap.
Part exchanges need particular care. HMRC’s page on other products and circumstances says the selling price must not be reduced by the value of a part-exchanged vehicle, and where a dealer over-allows on a trade-in, the purchase price of that trade-in is the figure agreed with the customer and shown on the sales invoice. Our earlier piece on keeping part-exchange decisions separate covers the commercial side of that conversation.
Stock book and invoice records for VAT margin scheme cars
Record keeping is a condition of the scheme, not an administrative extra. HMRC’s manual at VATMARG02200 says it cannot accept records other than those specified, and HMRC’s keeping records guidance says VAT records must be kept for six years. The tertiary legislation sets out the core fields:
| Record | What it must show |
|---|---|
| Stock book: purchase | Unique sequential stock number, purchase date, purchase invoice number, seller’s name, description and purchase price |
| Stock book: sale | Sale date, sales invoice number, buyer’s name, description, selling price or method of disposal, margin and VAT due on the margin |
| Stock book: vehicle details | Registration number (or VIN where there is none), make, model and colour |
| Sales invoice | Dealer’s name, address and VAT number, buyer’s name and address, invoice number and date, stock number, description and total price, with no VAT shown separately |
| Self-billed purchase invoice | Required when buying from a private individual or unregistered business: both parties’ details, invoice number and date, stock number, description and total price paid |
HMRC’s records guidance also expects margin scheme wording, such as “margin scheme: second-hand goods”, on scheme invoices. On the VAT return, output tax on the margin goes in box 1, the full selling price less the margin VAT in box 6 and the full purchase price in box 7, according to the VAT return section of the margin schemes guide.
Commercial vehicles, ex-fleet stock and electric cars
HMRC’s manual at VATMARG08100 confirms the scheme can be used for any eligible second-hand vehicle other than imports, including commercial vehicles. The practical limit is the purchase history. HMRC’s VAT on motoring expenses (Notice 700/64) says that where a business was charged VAT on a commercial vehicle and could recover at least part of it, VAT is due on the full selling price; a van bought from a private individual, with no VAT charged, can be sold under the margin scheme.
Ex-fleet cars follow the same logic. Notice 700/64 describes a qualifying car as one on which the full input tax block has not applied, and says such cars are sold on normal tax invoices with VAT on the full price. Leasing companies recovering VAT must state on their invoices whether each car is a qualifying car, which gives buyers the evidence they need when planning used car sourcing around an exit plan. By contrast, a car whose seller had its input VAT blocked is sold without VAT, and the buying dealer can use the scheme.
HMRC’s vehicle guidance does not set out a separate test for electric cars, so they become VAT margin scheme cars on the same purchase-history basis as petrol or diesel stock. An electric car bought privately can be margin stock; one bought from a lessor on a VAT invoice cannot. A warranty sold for a separate charge is standard-rated and sits outside the margin.
Northern Ireland is different. Since 1 May 2023, according to the ICAEW report on the change, the scheme cannot be used for second-hand vehicles bought in Great Britain and sold in Northern Ireland. HMRC’s second-hand motor vehicle payment scheme allows a claim where an eligible vehicle bought in Great Britain is moved to Northern Ireland or exported to the EU for resale.
Key points for used car retailers
- Treat eligibility as a sourcing question: the purchase invoice decides which vehicles can be sold as VAT margin scheme cars.
- Check ex-lease and ex-rental invoices for qualifying car status before pricing; VAT shown separately rules the vehicle out.
- Keep preparation costs out of the purchase price and reclaim their VAT through the normal rules where entitled.
- Record registration, make, model and colour in the stock book alongside the standard purchase and sale fields.
- Never show VAT separately on a margin scheme sales invoice, and record part exchanges at the agreed figure.
- Apply separate checks for Northern Ireland sales and for imported vehicles.
This article is general information, not tax, legal or financial advice.
Sources
- GOV.UK: Using the VAT margin scheme for second-hand vehicles
- GOV.UK: Buying second-hand vehicles using a VAT margin scheme
- GOV.UK: Selling second-hand vehicles using a VAT margin scheme
- GOV.UK: Other products and circumstances affecting the second-hand vehicles VAT margin scheme
- GOV.UK: VAT tertiary legislation, margin schemes
- GOV.UK: VAT margin schemes, keeping records
- GOV.UK: VAT margin schemes, VAT return
- GOV.UK: VAT Notice 718/1 (withdrawn)
- HMRC: VATMARG08100, what vehicles are eligible for the scheme
- HMRC: VATMARG08300, importing cars
- HMRC: VATMARG02300, what input tax can be reclaimed
- HMRC: VATMARG02200, records and accounts
- GOV.UK: VAT on motoring expenses (VAT Notice 700/64)
- GOV.UK: Using the global accounting VAT margin scheme
- GOV.UK: Check which motor vehicles are eligible for the second-hand motor vehicle payment scheme
- ICAEW: VAT second-hand margin schemes, new HMRC guidance
- ICAEW: VAT rules change for GB-bought second-hand vehicles sold in Northern Ireland
Sources checked in November 2026. Rules, rates and schemes can change after publication, so check the linked official pages before acting.
