Buying or selling a car in the UK often comes with questions about VAT. Whether you’re a private buyer, a car dealer, or a business owner, understanding the rules around VAT on used cars can save you from unexpected costs and help you make informed decisions. 

The rules can be confusing, especially when it comes to second-hand vehicles, VAT-qualifying cars, and the margin scheme. So, let's uncover everything you need to know about VAT on used cars. 

What Is VAT on Used Cars?

VAT (Value Added Tax) is a government tax applied to most goods and services, including vehicles. However, when it comes to used cars, VAT doesn’t always apply in the same way it does for new cars.

In fact, many used vehicles are sold without VAT being added separately, especially in private sales. However, when a dealer is involved or the car is VAT-qualifying, special rules may apply.

The Second-Hand Margin Scheme

The second-hand margin scheme is a VAT accounting method that dealers use when selling used vehicles. Instead of paying VAT on the full selling price, the dealer only pays VAT on the profit margin, that is, the difference between what they paid for the car and what they sold it for.

For example:

• A dealer buys a car for £8,000.
  
  
• They sell it for £10,000.
  
  
• The margin is £2,000, so VAT is only due on that £2,000, not the full selling price.
  
  

This scheme helps keep prices competitive for buyers, as VAT isn’t added in full to the sale price.

When VAT Applies to Used Cars

Here are the most common scenarios where VAT comes into play:

• VAT-Qualifying Used Cars
  If a car is VAT-qualifying, the dealer can sell it with VAT charged on the full selling price. This often applies to cars that were originally bought new by a business and had VAT reclaimed.
  
  
• Private Sales
  When you buy from a private seller, you are not required to pay VAT. The price you agree on is final.
  
  
• Pre-Registered Cars
  These are technically new cars registered by dealerships before sale. VAT usually applies to the full price, as they’re treated as new for VAT purposes.
  
  
• Business Cars and VAT Reclaim
  If a business buys a VAT-qualifying car, it may be able to reclaim VAT, but only if the car is used exclusively for business purposes. If there’s any private use, reclaiming VAT becomes very limited.
  
  

When the Margin Scheme Cannot Be Used?

Dealers cannot use the margin scheme in certain cases, such as:

• Brand-new vehicles.
  
  
• Imported cars from outside the UK.
  
  
• Cars bought with VAT are shown separately on the invoice.
  
  
• Category A or B insurance write-offs.
  
  
• Vehicles where VAT has already been reclaimed.
  
  

Records Dealers Must Keep

Dealers selling under the margin scheme must keep detailed records, including:

• A stock book listing each vehicle sold.
  
  
• Copies of purchase and sales invoices.
  
  
• Details of cars sold on a sale-or-return basis.
  
  

This ensures accurate VAT returns and compliance with HMRC.

Costs of EV Servicing UK (Linking VAT to Future Trends)

With the rise of electric vehicles (EVs), VAT rules still apply in similar ways. If you buy a used EV from a dealer, it could be VAT-qualifying or margin scheme–eligible, depending on its history. For businesses investing in EV fleets, VAT reclaim can also be possible if cars are for business use only.

In short: 

• Private sale = no VAT.
  
  
• Dealership sales may include VAT, depending on whether the car is VAT-qualifying or the margin scheme applies.
  
  
• Businesses may reclaim VAT on cars used solely for business.
  
  
• The margin scheme keeps VAT charges lower for many used car sales.
  
  

Final Thoughts

To sum it up! Understanding VAT on used cars in the UK is crucial, whether you’re buying privately, from a dealer, or as a business. Always ask whether a vehicle is VAT-qualifying or sold under the margin scheme, as this affects both the price you pay and the ability to reclaim VAT.

Visit a trusted used car dealership to get transparent pricing, clear VAT details, and peace of mind when buying your next vehicle in the UK

FAQs

1. Do I pay VAT when buying a second-hand car from a private seller?
   No. Private sales are outside the scope of VAT, so you won’t be charged.
2. What is a VAT-qualifying used car?
   A car is VAT-qualifying if VAT was charged when it was new and hasn’t been sold under the margin scheme. These cars allow VAT to be reclaimed by eligible businesses.
3. Can I reclaim VAT on a used car for my business?
   Yes, but only if the car is VAT-qualifying and used 100% for business purposes. If there’s private use, VAT reclaim is very restricted.
4. Are pre-registered cars treated as used cars for VAT?
   No. Pre-registered cars are technically new, and VAT applies to the full selling price.
5. How do dealers calculate VAT under the margin scheme?
   They calculate VAT on the difference between the purchase price and the selling price (the profit margin), not the total selling price.

    6. Do electric vehicles follow the same VAT rules as petrol and diesel cars?
        Yes. Whether it’s an EV or a traditional car, the same VAT rules apply when it comes to second-hand sales.