Motor dealers and VAT: selling new or used vehicles and extras

If you're a motor dealer it can be difficult to establish the correct VAT position when you sell a new vehicle. Transactions can be complicated because the vehicle manufacturer might require you to offer special promotions like:

  • cashback deals
  • discounts
  • extras included in the sale price - some might be at the reduced rate of VAT or outside the scope of VAT altogether

The VAT position when you sell a used vehicle is also affected by several factors - most importantly whether or not you paid VAT when you bought the car.

Because the position can be complex it's very important to be aware of and to follow the VAT rules.

This guide explains the VAT position when you sell new and used vehicles.

On this page:

Selling new vehicles

As a motor dealer you'll normally account for VAT at the standard rate when you sell a new vehicle to a customer. But you may be able to zero rate the sale if you supply the vehicle direct to a disabled person. You can find out more about this in the section of this guide that covers vehicles for disabled people.

What is a new vehicle?

For VAT purposes you're selling a 'new' vehicle even if:

  • you've pre-registered it - that is you've registered it but you don't yet have a customer for it
  • the vehicle's got delivery mileage on it

This means you can't sell it using the Margin Scheme for second-hand goods.

If you pre-register a vehicle in your own name you can't treat the road tax and the first registration fee as 'disbursements' when you sell the vehicle. (A disbursement is an expense that you pass on to your customer.) The cost of these is considered to be part of a single supply of the vehicle. You account for VAT at the standard rate on the total cost of the vehicle, including the road tax and the registration fee.

Find out what you can and can't treat as a disbursement for VAT purposes

Cashback deals

When you sell a new vehicle you charge VAT on the full selling price. Usually you can’t reduce the selling price by the amount of any cashback deal that the vehicle manufacturer offers to your customer.

There are different ways of accounting for this type of payment and your supplier should be able to give you accounting instructions. If you need any more help you can contact HM Revenue & Customs (HMRC) for guidance.

Contact HMRC for guidance on how to treat cashback deals

Your terms of supply

When you sell a new vehicle you might ask your customer for a deposit. You account for VAT on the deposit in the VAT period in which you receive it.

If you sell a new vehicle to a customer on hire purchase you invoice the finance house rather than your customer. You account for the VAT when you issue your invoice - which could well be before your customer takes delivery of the vehicle.

For VAT purposes, when you sell a vehicle on finance, the value of the vehicle on your invoice to the finance house must be the same as the value that you declare to HMRC and show in your business books and records.

Check the VAT position on deposits and credit sales

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Selling used vehicles - using the Margin Scheme

You may be able to use the Margin Scheme for second-hand goods to account for the VAT when you sell used vehicles, but you can’t use the scheme for vehicles where there is any VAT shown on the purchase invoice. Under the scheme, when you sell the vehicle, instead of paying VAT on the full selling price, you work out the VAT due only on your 'margin'. This is the difference between what you bought the vehicle for and what you sell it for.

You won't be able to use the scheme:

  • For new vehicles.
  • For vehicles that have been registered and only have delivery mileage. These count as new vehicles.
  • If your purchase invoice for the car shows any VAT.
  • For new or used vehicles that you import from outside the EU.
  • For new or used vehicles you buy from a business in another EU country on an invoice which does not show the Margin Scheme declaration for that country.
  • If you can't meet all of the Margin Scheme requirements - including record-keeping. You'll have to charge VAT on the full sale price of the vehicle instead.

Whenever you sell a vehicle under the Margin Scheme you must give your customer a sales invoice that follows the special rules for Margin Scheme invoices - whether they're VAT-registered or not.

Read the Margin Scheme invoice declarations used in other EU countries in Notice 718

More about operating the Margin Scheme for second-hand goods

More about the Margin Scheme for second hand cars can be found in Notice 718/1

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Using the Margin Scheme - points to watch

You can only use the Margin Scheme where there is no VAT shown on the purchase invoice you were given when you bought the vehicle. If any VAT is shown, you reclaim it in the normal way and then have to pay VAT on the full selling price of the vehicle.

There are some aspects of the scheme that you'll need to take care with:

  • The purchase price must be the value that's entered in the stock book when you buy the vehicle. You can't add things like delivery charges or the cost of repairs or refurbishments to it - this would reduce your margin so you would pay too little VAT.
  • As with any second-hand sale, if there's part-expired road tax you can't show that as a disbursement when you invoice your customer. It's part of a single supply of a taxed vehicle and part of the selling price.
  • In the same way, you can't show the MOT test fee separately as a disbursement - it's part of a single supply of a used, tested vehicle.
  • You can't use the scheme if you were charged VAT when you bought the vehicle - even if you didn't reclaim it. When you sell it you'll need to charge VAT on the full selling price.
  • If you import a used vehicle from outside the EU, you will be charged import VAT, so you can’t use the Margin Scheme.
  • You can’t use the Margin Scheme if you buy vehicles from a business in another EU country, or if the invoice you’re given doesn’t show the Margin Scheme declaration for that country.
  • If you make a loss when you sell a used car under the Margin Scheme it doesn't mean you get a VAT credit.
  • If you fit accessories to a vehicle they become part of a single supply of a vehicle. If you are selling the vehicle under the Margin Scheme, the selling price you use to calculate your margin must include the charge for the accessories. You can reclaim the VAT you paid on the accessories.

More about operating the Margin Scheme for second-hand goods

Read about the VAT Margin Scheme and global accounting in Notice 718

Read about the Margin Scheme for second-hand cars in Notice 718/1

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Selling extras and accessories

In most cases your customers won't be able to reclaim the VAT you charge when you sell them a new vehicle. They won't be able to reclaim the VAT on any accessories you fit as part of the sale either. This is because for VAT purposes the accessories are part of a single supply of a vehicle. So it's important that you don't invoice your customers separately for any accessories because they may then reclaim the VAT by mistake.

You'll need to include the accessories on the invoice for the new vehicle. You can treat them in either of the following ways:

  • itemised separately on the invoice
  • bundled together in the total price of the vehicle

Either way is fine. You account for VAT at the standard rate on the invoice total.

This also applies if you sell accessories with a used vehicle that you don’t sell under the Margin Scheme.

Children's car seats and motorcycle helmets

Some protective equipment isn't standard-rated for VAT purposes. For example:

  • Certain children's safety and booster seats, which are reduced-rated (currently 5 per cent) when you sell them separately. Note that if you supply a new car with a child's seat already fitted as an extra, then the whole supply - including the seat - is standard-rated.
  • Motorcycle helmets may be zero-rated.

Find out more about VAT on children's car seats

Read about when you can zero rate motorcycle helmets

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Selling statutory items like road tax and registration fees

Sometimes things like road tax and registration fees can be treated as disbursements. Disbursements are expenses that you pass on to your customer. They're outside the scope of VAT so you don't charge VAT on them when you invoice your customer.

Registration fees

When you first register a new vehicle you can treat the fee as a disbursement - but only if you deal with the first registration for your customer. If you're registering the vehicle in your own name you can't treat the fee as a disbursement when you come to sell the vehicle - it's part of a single supply of the vehicle. You add the fee to the vehicle's sale value and work out the VAT on the total.

Road fund licence

If your customer asks you to tax the vehicle they've bought from you, then you can treat the cost of the tax disc as a disbursement. But if the selling price of the vehicle they buy includes the road tax, then this is part of a single supply of a vehicle. You'll have to charge VAT on the total, including the cost of the road tax.

Find out what conditions must be met before something can be treated as a disbursement

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Selling guarantees, warranties, mechanical breakdown insurance or other insurances

If you sell some sort of warranty or breakdown insurance with a new or used vehicle, the VAT position depends on who is providing the cover.

In-house warranties

If you're taking all the risk, then you must charge VAT at the standard rate on the selling price of the guarantee, even if you take out 'stop loss' insurance yourself to cover any major potential risk.

Insurance backed warranties

If the warranty or guarantee held by your customer is a contract underwritten by an insurance company then the premium that your customer pays is exempt from VAT. You'll have to disclose to your customer, in writing:

  • the amount of the premium
  • any fee you charge for arranging the insurance

If you wanted instead to include the cost of the premium and any arrangement fee in the overall price of the vehicle then you would have to charge the standard rate of VAT on:

  • your arrangement fee - if you charge one
  • the part of the premium you keep - your commission

The net premium you pay to the insurance company remains exempt.

Find out more about VAT treatment of guarantees and warranties

More about insurance in Notice 701/36

Insurance Premium Tax (IPT)

IPT is charged on premiums for insurance relating to vehicles, and is paid to HMRC by the insurance company. But if you charge an arrangement fee to a customer under a separate contract you'll have to register for IPT, and account for IPT on the arrangement fees you charge.

Find out more about IPT

Second-hand vehicles and warranties

You might sell a second-hand vehicle and a warranty together for a single price. But you can't include the sale of the warranty in the calculation of your margin if you've given the warranty a value. The sale of the warranty is a separate supply of services and you'll have to account for VAT on the value.

If you advertise a Margin Scheme vehicle for sale with a free guarantee you can't reduce the vehicle's selling price by an amount to represent the guarantee when you work out the margin on which VAT is due. This is because no value has been given to the guarantee in your advertising.

For VAT purposes there are two supplies if your customer can choose whether or not to buy a guarantee with a Margin Scheme vehicle - and if both the price of the vehicle and the guarantee are separately negotiable. This means that VAT at the standard rate is always due on the selling price of the guarantee - even if you sell the vehicle at a loss under the Margin Scheme.

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Vehicles and boats for disabled people

Motor vehicles

When you supply a motor vehicle to a disabled person you can zero rate the sale as long as:

  • the motor vehicle is supplied to a disabled person who usually uses a wheelchair
  • the motor vehicle is permanently and substantially adapted
  • the adapted motor vehicle is for the domestic or personal use of the disabled person
  • you hold evidence from your customer that the purchaser or intended user is eligible for the relief

To qualify as permanently and substantially adapted, the adaptations must be intended to last indefinitely and cannot be removed quickly or easily. A substantial adaptation will alter the vehicle in a meaningful way to either:

  • enable a wheelchair user to use it where they couldn't have used it before it was adapted
  • include features whose design is such that their sole purpose is to allow a wheelchair used by a disabled person to be carried in or on the motor vehicle

Read more about the VAT relief for adapted motor vehicles for disabled people (PDF 1.3MB)

Boats

When you supply a boat to a disabled person you can zero rate the sale if:

  • the adapted boat is supplied to a disabled person
  • the boat is permanently and substantially adapted
  • the adapted boat is for the domestic or personal use of the disabled person
  • you hold evidence from your customer or third party that the purchaser or intended user is eligible for the relief

To qualify as permanently and substantially adapted a boat should include all or most of the following adaptations to suit the disability of the disabled buyer:

  • special washroom/toilet facilities accessible to the disabled person
  • push down spring return taps
  • kitchen adaptations
  • low windows, galley units and handrails
  • special beds to suit the disabled person
  • lifts and non-slip floors to accommodate wheelchair movement
  • wheelchair clamps and supports
  • embarking and disembarking adaptations
  • ramp for wheelchairs

Find more about the supply of boats in VAT Notice 701/7

Voluntary scheme for adapted motor and boat traders

A voluntary scheme has been introduced to gather information from businesses about zero-rated sales of adapted motor vehicles and boats to disabled people.

Read more about the voluntary scheme

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Sending vehicles abroad

As long as you meet certain conditions, you can zero rate the supply of a new or used vehicle to any of the following:

  • a customer in a country outside the EU
  • someone who isn’t registered for VAT who will take a new car to another EU country
  • a VAT-registered business in the EU

However, if you're selling a second-hand vehicle under the Margin Scheme to someone in the EU, then you must account for UK VAT on your margin. It doesn't matter whether or not your customer is VAT-registered.

Also, if you’re selling a used car to someone in the EU who isn’t VAT-registered, and you were charged VAT on the purchase of the car - a 'qualifying car' - then you must account for VAT on the full selling price.

There’s a special scheme for sales of new, used and Margin Scheme vehicles for individuals who intend to leave the EU. It's called the Personal Export Scheme (PES).

There’s also a special scheme for sales of new vehicles to individuals who are taking the vehicle to another country within the EU. These vehicles are referred to as New Means of Transport (NMT).

Read about the Personal Export Scheme for individuals

More about supplying vehicles under the Personal Export Scheme in Notice 707

More about New Means of Transport to be taken to another EU country in Notice 728

EC Sales List

You'll have to fill in an EC Sales List - form VAT 101 - for any vehicle where both of these are true:

  • your purchase invoice for the vehicle showed VAT
  • you supplied it to a VAT-registered business in another EU country

You don't have to complete an EC Sales List for a vehicle in either of these categories:

  • it was sold under the Margin Scheme
  • it was sold as New Means of Transport under the special scheme

Read how to complete an EC Sales List

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More useful links

Find out more about VAT when you buy vehicles for resale

Read about reclaiming VAT on the purchase of cars

Find out more about vehicles for disabled people

Find out the difference for VAT purposes between cars and other vehicles

Read more about VAT when selling vehicles to other EU countries in Notice 728

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