Most cars bought at auction by a used car dealer are sold under the VAT margin scheme, and most of the arithmetic mistakes dealers make on margin come from getting the scheme slightly wrong. This is the version that matches HMRC's rules and a real buy, in plain English. It is not tax advice; check anything unusual with your accountant.
What the margin scheme is
When you buy a used car from someone who did not charge you VAT (a private seller, a part-exchange, or a margin-scheme lot at auction) you cannot reclaim any VAT on the purchase, because there was none. In return, when you sell the car you only account for VAT on your margin, the difference between what you paid and what you sold it for, rather than on the whole selling price.
The sum
VAT is a sixth of the margin. Not a fifth: the margin is a VAT-inclusive figure, so the tax inside it is 20/120.
Worked example
- Hammer price at auction: £8,000
- Sold to a customer for: £10,500
- Margin: £2,500
- VAT due: £2,500 ÷ 6 = £416.67
- What you keep from the margin, before your costs: £2,083.33
If you sell for less than you paid, the margin is nil and no VAT is due on that car. You cannot use a loss on one car against the margin on another.
What does not reduce the margin
This is the part that catches people. The margin is selling price minus purchase price of the car and nothing else.
- Buyer's fees and premiums are a service the auction supplies to you. They carry VAT, and you reclaim that VAT as input tax in the normal way. They do not go into the purchase price of the car, so they do not shrink the margin you pay VAT on.
- Transport, preparation, parts, a service, an MOT are the same: costs of your business with reclaimable VAT where it was charged, not part of the car's purchase price.
- A vendor surcharge quoted "plus VAT" is a fifth on top: £85 plus VAT is £102 to you, and the £17 is input tax you reclaim. It is still not part of the purchase price.
Margin scheme or VAT qualifying?
Some auction lots are VAT qualifying: ex-fleet, ex-lease and ex-business cars where the vendor charges VAT on the hammer price. On those you reclaim the input VAT on the purchase, and when you sell you charge VAT on the full selling price, outside the margin scheme. The catalogue says which is which. Mixing the two up on one car is an expensive mistake in either direction:
| Margin scheme lot | VAT qualifying lot | |
|---|---|---|
| VAT on the hammer price | None charged, none to reclaim | Charged; reclaim it |
| VAT when you sell | A sixth of the margin | A sixth of the whole selling price |
| Shows VAT on the sales invoice? | No, never separately | Yes |
| Who it suits | Retail customers | VAT-registered buyers who can reclaim |
The records HMRC expects
To use the scheme you keep a stock book with, for every car: stock number, date bought, purchase invoice number, seller, registration, make and model, purchase price, date sold, sales invoice number, buyer, selling price, margin and VAT due. Purchase invoices from the auction and your own sales invoices support it. A sales invoice under the scheme must not show VAT as a separate amount, and should say the sale is under the margin scheme. Keep the lot for six years.
Doing the sums before you bid, not after
The trap is bidding on the hammer-to-retail gap and finding out at the year end what was left after VAT and costs. ForecourtIQ does the margin-scheme arithmetic on every lot before the sale: retail from your own achieved prices, a sixth of the margin taken off, then your standing fees, transport and prep, then a net figure you can actually bid against. The surcharge and the auction tariff are handled per auction house. The number on the card is what you would keep.