The VAT Margin Scheme on second-hand cars and other vehicles

HMRC Reference: Notice 718/1 (March 2011)
 

Contents

Foreword

1. Introduction

1.1 What is this notice about?

1.2 What’s changed?

1.3 Who should read this notice?

1.4 Force of law

2. Basic principles

2.1 Why would I want to use the Margin Scheme?

2.2 What are the conditions for using the Scheme?

2.3 What makes a vehicle eligible?

2.4 Can I sell all second-hand vehicles under the scheme?

2.5 What if I make sales under the normal VAT rules as well?

2.6 How does the Margin Scheme affect VAT on my overheads?

2.7 What if I buy vehicles from online auction sites?

2.8 What if I was charged VAT?

3. Making your Margin Scheme calculations

3.1 How do I calculate my selling price?

3.2 How do I calculate my purchase price?

3.3 How do I calculate the margin?

4. Buying and selling vehicles under the Margin Scheme

4.1 What must I do when I buy a vehicle?

4.2 What must I do when I sell a vehicle?

5. Records and accounts

5.1 What records must I keep?

5.2 What are the rules for stock books?

5.3 What are the rules for Margin Scheme invoices?

5.4 Filling in your VAT return

5.5 How long must I keep records?

5.6 Do I need to keep records for goods on sale or return?

5.7 How do I treat invoices in foreign currencies?

6. Example of a Margin Scheme stock book

6.1 How do I complete my stock book?

7. The Global Accounting scheme

7.1 What is the Global Accounting scheme?

7.2 Can I sell vehicles under Global Accounting?

7.3 What about sales of scrap?

8. Buying and selling vehicles at auction

8.1 Who should read this section?

8.2 What should I do if I buy eligible vehicles at auction?

8.3 What is the purchase price of eligible vehicles I buy at auction?

8.4 What is an indemnity fee?

8.5 What is the selling price of eligible vehicles I sell at auction?

9. Linked Insurance Products and Warranties

9.1 What are linked insurance products and warranties?

9.2 What if I don’t make a separate charge?

9.3 What if I make a separate charge for a linked insurance product?

9.4 What if I make a separate charge for a warranty?

9.5 What about supplies made under other schemes?

9.6 How does this work in practice?

10. Other issues which may affect your Margin Scheme calculations

10.1 Can I claim relief for bad debts?

10.2 How should I treat MOTs?

10.3 How should I treat road fund licences?

10.4 How should I treat vehicles I take in part-exchange?

10.5 How should I treat hire-purchase sales?

10.7 What if I buy an eligible vehicle from an insurance company or finance house?

10.8 What if I sell a vehicle which has been adapted for a disabled person?

10.9 What if I sell high value vehicles for cash?

10.10 How do I deal with gifts?

10.11 What if I sell a vehicle privately?

10.12 What if I only make occasional sales of eligible vehicles?

10.13 What is the Personal Export Scheme?

11. Transfers of going concerns and assignments of rights

11.1 What if I take over a business as a going concern (TOGC)?

11.2 What about the records?

11.3 What rules apply to banks and financial institutions?

11.4 What will my Margin Scheme purchase price be?

Your rights and obligations

Do you have any comments or suggestions?

Putting things right

How we use your information

 

Foreword

This is a new notice that has been introduced for businesses which deal in second-hand motor vehicles. The contents of this notice were previously included in Notice 718.

1. Introduction

1.1 What is this notice about?

This notice explains when you may use the Second-Hand Margin Scheme to account for VAT on your sales of second-hand vehicles.

It explains

  • which vehicles you can sell under the scheme
  • how the scheme works
  • how to calculate the margin, and
  • what records you must keep

This notice assumes that you have a working knowledge of basic VAT principles, as outlined in Notice 700 The VAT Guide.

If, after reading this notice, you need any further help or advice, please contact our VAT Helpline.

1.2 What’s changed?

The information in this notice used to be contained in Notice 718 Margin schemes for second-hand goods, works of art, antiques and collectors’ items. We have moved the things which are relevant to businesses who deal in second-hand motor vehicles into this separate, shorter notice so that you can find what you need more easily.

The rules about Margin Scheme declarations on invoices have changed: please see the table in section 5.3 for details.

We have updated the Notice to reflect the VAT rate of 20%.

1.3 Who should read this notice?

You should read this notice if you are registered for VAT and you make, or intend to make, supplies of second-hand vehicles.

1.4 Force of law

The VAT (Cars) Order 1992 requires businesses who sell vehicles under the Margin Scheme to keep the records and accounts detailed in sections 4 and 5 of this notice. All of sections 4 and 5 have legal force and supplement the law.

2. Basic principles

2.1 Why would I want to use the Margin Scheme?

If you sell second-hand vehicles on which you weren’t charged VAT, using the Margin Scheme will save you money.

Without the Margin Scheme, you would have to account for VAT on the full selling price of each vehicle.

But, if you use the Margin Scheme, you can account for VAT on the difference between the price you pay for a second-hand vehicle and the price you sell it for.

If you sell a vehicle for less than you paid for it, you won’t have to account for any VAT on the sale.

2.2 What are the conditions for using the Scheme?

You don’t have to use the Margin Scheme: it’s optional.

If you decide to use it, there are a number of conditions you will have to meet. If you can’t meet all the conditions, you can’t use the scheme.

The detailed conditions are explained throughout this notice. The main ones are:

  • The vehicles must be eligible (see paragraph 2.3.)
  • You must have acquired the vehicles in eligible circumstances. In most cases, this means that you have obtained eligible vehicles for resale in circumstances where VAT was not chargeable (see paragraph 2.4).
  • You must calculate the margin in accordance with the rules of the scheme. There are special rules about how to calculate your buying price, your selling price and your margin under the scheme. Your margin may not be the same as your profit margin (see paragraph 3.3)
  • You must meet the record keeping rules of the scheme. There are special rules about invoicing and stock records (see sections 4 and 5).

2.3 What makes a vehicle eligible?

Only second-hand vehicles can be sold under the Margin Scheme. Under the legal definition of second-hand goods, a second-hand motor vehicle is one which

  • has been driven on the road for business or pleasure purposes, and
  • is suitable for further use as it is or after repair

2.4 Can I sell all second-hand vehicles under the scheme?

No. You can only use the Margin Scheme if both

  • the vehicle, and
  • the circumstances in which you bought it

are eligible.

The table below explains which vehicles are eligible for the Margin Scheme.

You can use the Margin Scheme for second-hand vehicles you have bought from


You can’t use the Margin Scheme for


private individuals in the UK or another EC Member State.


  • new vehicles (registration and delivery mileage do not make a vehicle ‘used’ for margin scheme purposes), or
  • new means of transport purchased from other Member States.

New means of transport are always liable to VAT in the Member State of destination. You can find more information in Notice 728 New Means of Transport.


businesses not registered for VAT.


any vehicle purchased on an invoice which shows VAT separately – regardless of whether you reclaim the VAT.


dealers or businesses who were unable to reclaim the input VAT on purchase.


vehicles bought from registered dealers in other Member States which have not been supplied under a margin scheme.


VAT-registered dealers, if sold to you under the Margin Scheme (this should be clear from the invoice you receive).


imported vehicles - including vehicles collected on your behalf.


VAT-registered dealers in other Member States, if supplied to you under a margin scheme.


category A and B write-off vehicles, or any vehicle which is subject to the End Of Life Directive.


Motability – for which you have an invoice showing VAT charged at the zero-rate.


 

2.5 What if I make sales under the normal VAT rules as well?

You can use the Margin Scheme for some of your sales and the normal rules for others.

But, if you have sold a vehicle under the normal VAT rules (that is, you have charged VAT on the full selling price), you cannot go back and apply the Margin Scheme to that sale later.

2.6 How does the Margin Scheme affect VAT on my overheads?

You can reclaim the VAT you are charged on any business overheads, repairs, parts or accessories. But you must not add any of these costs to the purchase price of the vehicles you sell under the scheme.

See paragraph 3.2 for more detailed information on how to calculate your purchase price.

2.7 What if I buy vehicles from online auction sites?

If you buy a second-hand vehicle from an online auction site, you are responsible for finding out

  • whether the person selling the vehicle is VAT-registered, and
  • whether the vehicle is eligible to be sold under the Margin Scheme.

If the vehicle is eligible, and you want to sell it under the scheme, you must keep all the records described in section 5.

2.8 What if I was charged VAT?

If you have

  • reclaimed, or
  • were entitled to reclaim.

VAT on a second-hand vehicle, you cannot use the Margin Scheme when you sell it. You must account for VAT on the full selling price under the normal rules.

This includes

  • import VAT charged on vehicles purchased from a third country, and
  • acquisition tax chargeable on purchases from dealers in other EC Member States.

3. Making your Margin Scheme calculations

3.1 How do I calculate my selling price?

Your selling price is everything which you are to receive for the vehicle, whether from the buyer or a third party. It includes:

  • incidental expenses directly linked to the sale, for example, where you have had to pay for an MOT to make the vehicle saleable, and
  • accessories fitted prior to the sale.

Disbursements do not form part of the selling price: these should be accounted for separately outside the Margin Scheme. Section 9 contains information on how you should treat linked insurance products and warranties.

The consideration you receive may not be wholly in money: if that is the case, the normal rules about value in Notice 700 The VAT Guide will apply.

3.2 How do I calculate my purchase price?

Your purchase price is everything which you had to pay for the vehicle: it will mirror the rules for the selling price described in paragraph 3.1.

You must not include any cost to you of bringing the vehicle to sale. Your purchase price does not include the cost of any repairs, refurbishment, accessories or your business overheads.

For example, if you purchase new parts and fit them to a car, you must not add the cost of those parts to the purchase price of the car. You must use the original price you paid for the car when you calculate the margin for the purposes of the scheme.

Remember: the Margin Scheme taxes the difference between what you paid for the vehicle and what you sold it for, not the overall profit you have made on it.

3.3 How do I calculate the margin?

Under the Margin Scheme, you only have to account for VAT when you sell a vehicle for more than you paid for it.

To work out the VAT due on an individual sale, follow the steps in the example below:

Term


Description


(a) Purchase price


£1500


(b) Selling price


£2000


(c) Gross Margin (b – a)


£500


(d) VAT payable (c x 1/6)


£83.33


The VAT fraction allows you to calculate the amount of VAT included in a given sum of money.

A standard rate of VAT of 20% gives a ‘VAT fraction’ of 1/6. When you have worked out your gross margin, multiply the figure by 1, then divide by 6.

4. Buying and selling vehicles under the Margin Scheme

The rules in this section have the force of law.

4.1 What must I do when I buy a vehicle?

The table below lists the steps you must follow when you buy a vehicle for resale under the Margin Scheme.

Step


Action


Details


1


Check that the vehicle is eligible for the scheme.


See section 2 for these rules.


2


Obtain a purchase invoice.


If you are buying from a private individual or an unregistered business, you must make out the invoice yourself and include the details in paragraph 5.3.


3


Enter the purchase details of the vehicle in your stock book under the appropriate headings.


The purchase price must be the one you agreed with the seller. You must not alter this price and you must not add the cost of repair, refurbishment or business overheads to it.


If you buy a number of vehicles as a single lot but intend to sell them separately, you must allocate a purchase price to each item.


4.2 What must I do when I sell a vehicle?

The table below lists the steps you must follow when you buy a vehicle for resale under the Margin Scheme.

Step


Action


Details


1


Check first that you have followed all of the rules relating to the purchase of the vehicle.


See paragraph 4.1. If you have not, you cannot use the Margin Scheme.


2


Make out a sales invoice.


The invoice must include all of the details in paragraph 5.3.


3


Enter the sales details of the vehicle in your stock book under the appropriate headings.


 

4


Issue the invoice to your customer and keep a copy for your records.


If you include more than one vehicle on the same sales invoice, you must allocate a selling price to each one.


5. Records and accounts

The rules in this section have the force of law.

5.1 What records must I keep?

Notice 700/21 Keeping VAT Records gives guidance on the general records you must keep if you are registered for VAT.

If you use the Margin Scheme, there are some additional record keeping rules which apply to your stock book and invoices – paragraphs 5.2 to 5.3 give details.

These additional rules exist so that our officers can use your records to check the margin you have achieved on each vehicle you have sold. It’s important that you keep to these rules so that you can continue using the Margin Scheme. If we can’t check the margins you have declared from your records, VAT will be due on the full selling price of the vehicles you’ve supplied, even if they were otherwise eligible for the scheme. If you are not sure whether your records meet the Margin Scheme rules, please contact our VAT Helpline.

5.2 What are the rules for stock books?

You must keep your stock book up to date and it must include all of the information in the table below. This applies to each vehicle you purchase for resale under the Margin Scheme. You may, if you wish, include further information for your own accounting purposes.

Purchase details


Sales details


Stock number in numerical sequence


 

Date of purchase


Date of sale


Purchase invoice number


Sales invoice number


Purchase price


Selling price, or method of disposal


Name of seller


Name of buyer


Vehicle registration number


 

Description of the vehicle (for example, make and model)


 
 

Margin on sale (sales price less purchase price)


 

VAT due (margin x VAT fraction – 1/6)


You must include your Margin Scheme calculations under the appropriate headings in your stock book. If your purchase price is higher than, or the same as, your selling price, then no VAT will be due. In these circumstances you should show the VAT due as ‘Nil’ in your stock book.

You must not offset any VAT on vehicles which are sold at a loss against VAT on vehicles which you have sold at a profit.

An example of a Margin Scheme stock book is included at section 6.

5.3 What are the rules for Margin Scheme invoices?

The information in the table below must always appear on the invoices you receive, or issue.

Remember: if you are buying from a private individual or an unregistered business, you must make out the purchase invoice yourself.

Purchase invoices


Sales invoices


seller’s name and address


your name, address and VAT registration number


your name and address


the buyer’s name and address


a means of cross-referencing between the sales system and the stock book, for example, the stock book number


a means of cross-referencing between the sales system and the stock book, for example, the stock book number


invoice number (unless you made out the purchase invoice yourself)


invoice number


date of transaction


date of transaction


a description of the vehicle, including its registration number


a description of the vehicle, including its registration number


total price – you must not add any other costs to this price


total price – you must not show VAT separately


if you have bought the vehicle from another VAT-registered business,:


  • Scheme - second hand goods
  • Scheme - second hand goods

Note: If you have received a purchase invoice which shows that VAT has been charged on the vehicle, then the vehicle is not eligible to be sold under the Margin Scheme – regardless of whether you have claimed the VAT.

5.4 Filling in your VAT return

You will need to fill in a VAT return at the end of each tax period. Here are the special rules you must follow for any vehicles which you have bought or sold under the Margin Scheme during the tax period:

  • Box 1 Include the output tax due on all eligible vehicles sold in the period covered by the return.
  • Box 6 Include the full selling price of all eligible vehicles sold in the period, less any VAT due on the margin.
  • Box 7 Include the full purchase price of eligible vehicles bought in the period.

There is no requirement to include Margin Scheme purchases or sales in boxes 8 and 9 of your VAT return.

Further guidance on how to fill in VAT returns is available in Notice 700/12 Filling in your VAT return.

5.5 How long must I keep records?

Generally, you must keep all your business records for VAT purposes for at least six years. If the six year rule causes you serious storage problems or undue expense, then you should consult our VAT Helpline. We may be able to allow you to keep some records for a shorter period.

But if your current stock includes vehicles which you obtained more than six years ago, you must retain all the evidence which will show their eligibility for Margin Scheme treatment when you eventually sell them.

5.6 Do I need to keep records for goods on sale or return?

If your stock includes vehicles supplied to you on a sale or return basis (see Notice 700 The VAT Guide, paragraph 14.4), you must include, in your stock book or in a separate record, the following details for each vehicle:

  • the date of transfer of the vehicle
  • description of the vehicle, including its registration number
  • the name and address of the dealer/person transferring the vehicle, and
  • the date of sale or return.

Similarly, if any vehicles are removed from your stock on a sale or return basis to another dealer’s premises, you should note your stock record with the date and details of the dealer to whom you have transferred the vehicles.

If you sell a vehicle on behalf of a third party, and you issue an invoice for that vehicle in your own name, you are acting as an agent for VAT purposes and you must account for any output tax on the sale. You can find out more about agents and the Margin Scheme in Notice 718 The VAT Margin Scheme and Global Accounting.

5.7 How do I treat invoices in foreign currencies?

If you are buying and selling an eligible vehicle in a foreign currency (including euro), you must convert the price into sterling in order to calculate your margin.

Term


Description


Purchase invoices


If you buy a number of vehicles at an inclusive price and do not intend to sell them as one lot, you must convert the price to sterling and then apportion this amount between the vehicles.


You must then enter the sterling amounts in your stock record on a vehicle by vehicle basis.


Sales invoices


If you issue a sales invoice in a foreign currency, the invoice must also show the sterling equivalent of the selling price.


If the invoice covers more than one vehicle, it must show the price, both in foreign currency and sterling, for each vehicle. You must then enter the sterling amounts in your stock record on a vehicle by vehicle basis.


If, however, you are selling as one lot vehicles which you bought as one lot, you need only show a total foreign currency and sterling value for that lot.


To convert amounts in foreign currencies you must use one of the methods outlined in Notice 700 The VAT Guide. Whichever method you choose, you must use the exchange rate which was current at the time the transaction took place.

6. Example of a Margin Scheme stock book

6.1 How do I complete my stock book?

Example:

Purchase Details


1


2


3


4


Stock number


Date of purchase


Purchase invoice no


Purchase price


100


01/02/08


50


£2500


Purchase Details


5


6


7


Name of seller


Vehicle registration no


Description of vehicle


Mr J Smith


R123ABC


Ford Fiesta 1.4L


Sales Details


 

Accounting Details


8


9


10


 

11


12


13


Date of sale


Sales invoice number


Name of buyer


 

Selling price


Margin (11-4)


VAT due (12 x 1/6)


31/03/08


150


Mr F Bloggs


 

£3000


£500


£83.33


7. The Global Accounting scheme

7.1 What is the Global Accounting scheme?

Global Accounting is an optional, simplified variation of the normal Margin Scheme. Under Global Accounting, VAT is accounted for on the margin achieved on total eligible sales less total eligible purchases in each VAT period.

Individual items sold under Global Accounting must have a purchase price of £500 or less.

This notice does not deal with the general rules for using Global Accounting. For detailed information on the Global Accounting scheme, including the record keeping requirements, please see Notice 718.

7.2 Can I sell vehicles under Global Accounting?

No. Motor vehicles are excluded from being sold under the Global Accounting scheme.

7.3 What about sales of scrap?

Motor vehicles which would be eligible for sale under the Margin Scheme may be included in the Global Accounting scheme if they are sold on as scrap.

You must keep the normal commercial documentation to show that the vehicle no longer exists and that the parts are therefore eligible for Global Accounting.

If


then


the vehicle has already been entered into your second-hand stock book


you should close the entry and transfer the details to your Global Accounting purchase records.


you buy a scrap motor vehicle for more than £500


you can still use the Global Accounting scheme for disposal of the components.


However, any individual component valued at over £500 must be excluded from Global Accounting.


you are charged VAT separately when you buy a vehicle


you cannot sell any scrap parts from that vehicle under either Global Accounting or the Margin Scheme.


8. Buying and selling vehicles at auction

8.1 Who should read this section?

You should read this section if

  • you sell second-hand vehicles under the Margin Scheme, and
  • you buy or sell vehicles through auctions.

8.2 What should I do if I buy eligible vehicles at auction?

If you want to use the Margin Scheme (or Global Accounting, if you are buying vehicles for scrap) for the onward sale of a vehicle you have bought at auction, you must check whether the vehicle you want to buy is eligible for onward sale under the scheme.

You should be able to find this out from the auctioneer’s sales catalogue.

If the auctioneer charges VAT separately on the hammer price of a vehicle you buy, you won’t be able to use the Margin Scheme or Global Accounting for your onward sale.

8.3 What is the purchase price of eligible vehicles I buy at auction?

Your purchase price will be the hammer price of the vehicle plus charges for services.

The invoice you get from the auctioneer will itemise, for each lot you have bought, the hammer price of the goods and any charges for services (for example, buyer’s premium). These charges must not show VAT separately.

This will be your purchase price for the purposes of the Margin Scheme or Global Accounting, and is the amount that you must show in your stock book. It should be clearly identified on the invoice you get from the auctioneer..

If the auctioneer bills you for any other services, and charges VAT on them separately, you can reclaim the VAT under the normal rules. You must not add those charges to your own Margin Scheme purchase price. To avoid confusion, you may want to ask the auctioneer to provide you with a separate invoice for such charges.

If you are in any doubt about what your Margin Scheme purchase price should be for a vehicle you have bought at auction, you should check with the auctioneer.

8.4 What is an indemnity fee?

When you buy a vehicle at auction, you will usually be charged an indemnity fee. This is a charge which ensures that you will have compensation or indemnity if the vehicle you have bought is later found to have been stolen or to have finance outstanding on it.

You must not include the indemnity fee in your purchase price for Margin Scheme purposes.

8.5 What is the selling price of eligible vehicles I sell at auction?

Before the sale is due to take place, you should discuss with the auctioneer whether you want it to be treated under the Auctioneers’ Scheme or under the normal Margin Scheme. (The Auctioneers’ Scheme is a special variation on the normal Margin Scheme. It works by creating a margin which is equal to the auctioneer’s charge for his services to both the vendor and the purchaser.)

If the auctioneer uses


the invoice will include


Your Margin Scheme selling price will be


the Auctioneers’ Scheme


  • the hammer price of the goods
  • his commission charges, and
  • the net amount payable to you.

None of these amounts should show VAT separately.


Any other charges for services must be invoiced separately.


the hammer price less the commission charge.


the Margin Scheme


the hammer price of the goods.


VAT must not be shown separately on this amount.


The auctioneer’s commission and any other charges for services must be invoiced separately.


the hammer price.


Your selling price for Margin Scheme purposes should be easy to identify from the invoice you receive. You should check with the auctioneer if you are in any doubt.

If the Auctioneers’ Scheme is used, you will be invoiced separately for any other charges.

If the Margin Scheme is used, you will be invoiced separately for

  • the auctioneer’s commission, and
  • any other charges.

You can reclaim the VAT on these invoices under the normal rules but you must not deduct the charges from your Margin Scheme selling price.

9. Linked Insurance Products and Warranties

9.1 What are linked insurance products and warranties?

A linked insurance product is a contract of insurance between an insurer (usually someone other than yourself) and the purchaser of a vehicle. The contract will provide cover against particular risks.

Linked insurance products include

  • Mechanical Breakdown Insurance (MBI)
  • Guaranteed Asset Protection (GAP)
  • key, wheel and tyre cover, and
  • paint and fabric damage cover.

A warranty is an undertaking, or guarantee, which you give to your customer that, if goods should prove to be faulty within a specified time or mileage limit, you will bear the cost of providing the appropriate repairs or replacement parts.

The situations which can commonly arise are described below, together with the appropriate VAT treatment.

If you arrange linked insurance products for your customers, you should read Notice 701/36 Insurance in addition to the rest of this section.

In addition, insurance-backed warranties or MBI policies etc., are subject to the Higher Rate of Insurance Premium Tax (IPT). Generally, insurers account for IPT. However, if you make a charge in connection with this type of insurance, you may need to register and account for IPT on those charges. We have included some specific information in this section and you can find further information on the higher rate of IPT in Notice IPT1 A General Guide to IPT.

9.2 What if I don’t make a separate charge?

If you provide your customer with a ‘free’

  • linked insurance product, or
  • warranty,

then the selling price of the vehicle for Margin Scheme purposes includes the cost to you of supplying the product.

Any mention of the linked insurance product on your invoice must show that no separate charge is being made.

The price of the vehicle shown on the sales invoice to the customer must be the same as that entered in your stock book.

9.3 What if I make a separate charge for a linked insurance product?

If you arrange linked insurance products for your customer to purchase, you are acting as an agent of the insurance company. The VAT treatment depends on whether any risk covered by the insurance policy is yours or your customer’s.

9.3.1 When is the charge exempt?

The supply of the linked insurance product is exempt if it satisfies the following conditions:

  • it is supplied under a contract of insurance between an insurer and your customer
  • it is your customer’s risks which are insured
  • your customer is entirely free to purchase the vehicle without the insurance product, and
  • you disclose the insurance premium and any other amount (fees or commission) being charged (see Notice 701/36 Insurance) to the customer.

Under these conditions, there are separate supplies of the vehicle and the insurance, each with its own consideration.

Your selling price for the purposes of calculating the margin on the vehicle must not include the charge for the insurance product.

9.3.2 When is the charge standard-rated?

If the insurance contract is between you and the insurer, and only your risk of having to repair defective items is covered, then the supply is standard-rated.

You must account for

  • VAT on the margin (if there is one) on the vehicle under the Margin Scheme, and
  • VAT on the standard-rated ‘insurance’ charge outside the Margin Scheme.

9.3.3 What if the circumstances are more complicated?

The table below gives you the rules you must follow in other situations.

If


then


you subsequently negotiate with the customer a reduced price for the vehicle (including the linked insurance product)


the exempt premium payable for the linked insurance product remains unchanged.


negotiations with the customer result in the supply of an upgraded linked insurance product with an increased premium due from the customer


you must itemise the product separately and show the increased exempt premium.


you advertise the vehicle and the linked insurance product at a single price, that is you do not disclose to the customer the amount of the premium


any fee or commission income you receive in relation to this insurance is standard-rated.


The net premium paid to and retained by the insurer remains exempt.


You must only show the selling price of the vehicle, net of the insurance, in your stock book.


See paragraph 9.6, example 2.


In all cases, the value shown on the sales invoice for the vehicle itself must be the same as that entered in your stock book.

You can find further information on the implications of these arrangements for Insurance Premium Tax in Notice IPT1 A General Guide to IPT.

9.4 What if I make a separate charge for a warranty?

If you provide a warranty, and make a separate charge for it, that charge will be standard-rated.

Your selling price for the purposes of calculating the margin on the vehicle must not include the charge for the warranty.

You must account for

  • VAT on the margin (if there is one) on the vehicle under the Margin Scheme, and
  • VAT on the standard-rated charge for the warranty outside the Margin Scheme.

The value shown on the sales invoice for the vehicle must be the same as that entered in your stock book.

9.5 What about supplies made under other schemes?

The supply of a warranty or a linked ‘insurance’ product under any other type of scheme is standard-rated.

For example, a dealer may set up a ‘fund’ into which amounts charged to customers for warranties are paid, and from which repair claims are met. The dealer may obtain insurance cover against any deficiency in the fund. These policies are covered by arrangements commonly known as ‘stop-loss’. In such circumstances, there is no contract of insurance between the insurer and the customer purchasing an item. Only the dealer’s risk is insured, so any charge to the customer will be taxable at the standard rate.

9.6 How does this work in practice?

Example 1

In this example, the amount due under the contract of insurance is £200 (the net amount payable to the insurer is £120 and the commission you retain is £80).

If


then the VAT treatment is


the gross premium (£200) is disclosed to the customer


£200 exempt, consisting of


  • £120 net exempt premium which you, as agent, pass to the insurance provider, and
  • £80 exempt commission, which you keep.

the gross premium is not disclosed to customer


  • £120 net exempt premium which you, as agent, pass to the insurance provider, and
  • £80 standard-rated commission, which you keep. You must account for the VAT on this outside the Margin Scheme.

In this example, IPT is due on the gross premium of £200.

If


then


you disclose the gross premium to the insurance provider


they will account for the IPT.


you choose not to disclose the commission (£80) to the insurance provider


you may be liable to register and account for the higher rate of IPT (17.5%) on this amount in addition to any VAT that may be due.


Example 2

In addition to the £200 in the example above, you charge the customer a fee of £50 for arranging the insurance-backed product.

If


then the VAT treatment is


the value of both:


  • the amount due under the contract and
  • the fee


are disclosed to the customer


£250 exempt, consisting of:


  • £120 net exempt premium which you, as agent, pass to the insurance provider, plus
  • £80 exempt commission and
  • £50 exempt fee, both of which you keep.

either:


  • only the value of the amount due under the contract of insurance is disclosed, and not the fee, or
  • only the fee is disclosed and not the amount due under the contract of insurance
  • £120 net exempt premium, which you, as agent, pass to the insurance provider, plus
  • £80 standard rated commission, and
  • £50 standard-rated fee, both of which you keep.


You must account for the VAT on these charges outside the Margin Scheme.


In this example, IPT is due on £250.

If


then


  • the whole charge is made under the contract of insurance, and
  • you disclose the gross premium to the insurance provider

they will account for the IPT.


  • you do not disclose the commission (£80) to the insurance provider, and/or
  • the £50 fee is charged under a separate contract between you and your customer

you must register and account for IPT on these amounts in addition to any VAT that may be due.


If you receive a lot of VAT-exempt income from providing linked insurance products, there is a possibility that your business may be partially exempt. See Notice 706 Partial Exemption for more information.

10. Other issues which may affect your Margin Scheme calculations

10.1 Can I claim relief for bad debts?

If you supply goods and do not receive payment within certain time limits, you may claim relief from VAT on the ‘bad debt’. You will find full details of the time limits and conditions for claiming in Notice 700/18 Relief from VAT on bad debts.

Under the Margin Scheme, the amount of VAT on which you claim relief cannot exceed the amount of VAT previously accounted for on the margin. This is best explained by two examples based on the following figures:

Vehicle purchased for: £400

Vehicle sold for: £500

Margin on which VAT is paid to Customs: £100

VAT payable (£100 x 1/6): £16.66

Example 1. The customer only pays £350 leaving a debt of £150. The debt is greater than the margin so the potential bad debt relief is £100 (the margin) x 1/6 = £16.66.

Example 2. The customer pays £450 leaving a debt of only £50. This debt is less than the margin so the potential bad debt relief is £50 (the debt) x 1/6 = £8.33.

If you receive payment from your customer after making a claim for bad debt relief, you must refund the appropriate amount to HMRC.

10.2 How should I treat MOTs?

If you sell a second-hand car with an MOT, you are making a single supply.

You should not deduct the value of the MOT from your Margin Scheme selling price.

You should record the full selling price, including the MOT, in your stock book, and you should use this figure for calculating the margin on the sale.

10.3 How should I treat road fund licences?

If you


then


buy a vehicle for resale under the Margin Scheme and you surrender its unexpired road fund licence for a refund


you must not adjust the purchase price of the vehicle by the amount of that refund.


  • sell a vehicle with an unexpired licence, or
  • offer a road fund licence as part of an agreed sale price

you are making a single supply.


You must include the value of the licence in the selling price entered in your stock book.


agree to obtain the licence on behalf of the customer, after negotiating the sale of a car


you may treat the licence as a separate supply, provided you can meet the conditions for a disbursement as explained in Notice 700 The VAT Guide.


If you cannot meet those conditions, the car and licence are treated as a single supply and you must calculate your margin on the total, combined value.


10.4 How should I treat vehicles I take in part-exchange?

10.4.1 Selling price

If


then


you sell an eligible vehicle and take another in part-exchange


you must not reduce the selling price on which you calculate your margin by the value of the part-exchanged vehicle.


For example, you sell a car for £2,500 which you bought for £1,500.

You take a car in part-exchange which you value at £200. The customer pays the balance of £2,300.

The selling price you insert in your stock book must be £2,500 and you must account for VAT on the full margin of £1,000.

10.4.2 Purchase price

When you take a second-hand commercial vehicle in part-exchange, it is important to check whether your customer is VAT-registered. If your customer is registered for VAT, he must issue you with a sales invoice.

As with all vehicles you plan to sell, you must check whether the vehicle you take in part-exchange is eligible to be sold on under the Margin Scheme (see paragraph 2.4).

If the vehicle is eligible for the Margin Scheme, you must include its details on the purchase side of your stock book. In the example above, your purchase price would be £200. You must not alter this purchase price.

If you over-allow on the value of the vehicle you have taken in part-exchange, your purchase price for the purposes of the Margin Scheme must be the one you agreed with your customer and which appears on the sales invoice.

For example, you sell a car for £3,500 which you bought for £2,000.

You take a car in part-exchange for which you allow £800, so the customer pays the balance of £2,700. However, the book value of the part-exchange is only £600.

The purchase price in your Margin Scheme stock book must be £800.

10.4.3 Points to watch

If you buy from a private person, or from a business which is not registered for VAT, you may include the details of the part-exchange vehicle on your sales invoice provided all the requirements of paragraph 5.3 are met.

If you take a low value car in part-exchange, and sell it for parts (either useable parts, or parts as scrap metal), you cannot account for those sales under the Margin Scheme.

If you sell it for useable parts, you must account for VAT on the full selling price of each item sold.

See section 7 for the rules to follow when you sell an entire vehicle to be broken into scrap or break a vehicle into parts.

10.5 How should I treat hire-purchase sales?

10.5.1 Who is my customer?

If


then


you sell an eligible vehicle and arrange hire-purchase (HP) terms with a finance company on behalf of your customer


you are deemed to be selling the vehicle to the finance company.


10.5.2 What sales records do I need to keep?

You must transfer the sales price of the item from the HP documentation to your stock book.

If


then you must


  • you have issued your own sales invoice to your customer, and
  • you have a copy of the HP agreement

either


  • attach a copy of the completed HP agreement to the sales invoice, or
  • include a cross-reference to the HP agreement in your sales records.

the finance company holds the HP agreement and you don’t get a copy of it for your records


keep a copy of


  • the agreed quotation, or
  • the agreed proposal documents

together with:


  • the name of the finance company
  • the date, and
  • the reference number of the final agreement

in your sales records.


You may use a copy of the HP agreement as your sales invoice provided it shows:

  • all the identifying details of the item, and
  • the cash price of the item as the gross price payable.

(The gross price is the amount borrowed plus any cash deposit paid, plus any amount allowed for a part-exchange item.)

Remember, VAT must not be shown separately on either:

  • the HP agreement, or
  • the customer’s sales invoice.

10.5.3 What is my selling price for a hire-purchase vehicle?

The values shown on any documentation raised to the finance company must always be the same as the values declared to HMRC in your books and records. This includes the value of any part-exchange vehicle or cash deposit paid by the customer.

10.6 What if I rebuild a vehicle?

If


then


  • you build a vehicle from one or more used vehicles which you acquired under eligible circumstances, and
  • the Driver and Vehicle Licensing Agency (DVLA) does not require it to be re-registered

you can sell it under the Margin Scheme.


The purchase price you enter in your stock book is the price you paid for the vehicle for which the registration number is carried forward.


  • you construct a vehicle from the used components and parts of other vehicles, and
  • the DVLA gives it a new registration number

you cannot use the Margin Scheme.


You must account for VAT on the full selling price.


10.7 What if I buy an eligible vehicle from an insurance company or finance house?

If you buy an eligible vehicle from


you will not be charged VAT provided


  • an insurance company which has acquired it as a result of an insurance claim, or
  • a finance house which has repossessed it
  • the vehicle is sold on to you in exactly the same state, and
  • it was obtained by the insurance company/finance house from a person who would not have charged VAT on its supply, for example, a private individual.

You can resell such vehicles using the Margin Scheme provided you meet the conditions in paragraph 2.2.

10.8 What if I sell a vehicle which has been adapted for a disabled person?

Notice 701/59 Motor Vehicles for disabled people explains when a vehicle which has been adapted for use by a disabled person will be zero-rated.

There would be no benefit to you in selling a zero-rated vehicle under the Margin Scheme. You can sell the vehicle outside the Margin Scheme by closing its entry in your Margin Scheme stock book. You should refer in your stock book to the reason why you have closed the entry. You can then raise an invoice for the vehicle in the usual way, as you would do for any sale you make outside the Margin Scheme.

10.9 What if I sell high value vehicles for cash?

Accepting cash payments for the second-hand vehicles you sell won’t affect your Margin Scheme calculations. However, if you sell a vehicle for the equivalent of 15000 euro or more, and take payment for it in cash, you will need to register with HMRC as a High Value Dealer. See Notice MLR6 Registration guide for High Value Dealers for more information.

10.10 How do I deal with gifts?

You cannot use the Margin Scheme when you sell a vehicle which was given to you. You must account for VAT on the full selling price.

If you give away a vehicle which would have been eligible for sale under the Margin Scheme, no VAT is due. But you must include full details of the person you gave the car to in your stock book.

10.11 What if I sell a vehicle privately?

The private sale of goods which are not assets of your business is usually outside the scope of VAT and no VAT is due.

However, if

  • you are a sole proprietor, and
  • you sell an eligible vehicle (see paragraph 2.3) which you transfer to your business from your private holdings

you can use the Margin Scheme for the sale of that item.

You must be able to produce evidence of what the purchase price was when you bought it for your private use. If you cannot do this, you must account for VAT on the full sales value.

10.12 What if I only make occasional sales of eligible vehicles?

If


then


you are not in business to buy and sell second-hand vehicles, but


  • you very occasionally find yourself with an eligible one to sell, and
  • you would like to use the Margin Scheme for the sale

you need not comply with the full record keeping requirements in section 5, provided you:


  • meet the other conditions of the scheme, and
  • hold evidence of both the purchase and selling price.

10.13 What is the Personal Export Scheme?

The Personal Export Scheme allows entitled customers to buy a new or used motor vehicle in the UK free of VAT for export outside the European Community. If you want to sell vehicles under the scheme, you will need to read Notice 705A VAT: Supplies of vehicles under the Personal Export Scheme for removal from the European Community.

11. Transfers of going concerns and assignments of rights

11.1 What if I take over a business as a going concern (TOGC)?

If you obtain vehicles under a transfer of a going concern (TOGC), no VAT will be chargeable on the transfer. However, this does not necessarily mean that you will be able to sell the vehicles on under the Margin Scheme.

You will only be able to use the scheme if the last person to obtain the vehicles – other than by way of a TOGC or an assignment of rights – would have been entitled to use the Margin Scheme to sell them.

Where there has been

  • a succession of TOGCs or assignments, or
  • a mixture of both

it is the first person in that chain who must have been entitled to use the Margin Scheme himself.

11.2 What about the records?

From 1 September 2007, the seller of a TOGC retains the records. However:

  • the seller must make available to the buyer any information the buyer needs to comply with his duties under the VAT Act 1994
  • where the buyer applies to HMRC for permission to take on the seller’s VAT number, the seller is still required to transfer the records to the buyer. If the seller needs to retain the records, he may apply to HMRC for permission to do so.

The records will include the purchase invoices for stock on hand. You will be able to tell from these invoices whether or not the vehicles are eligible to be sold the scheme.

If


then


the transferor of the vehicles bought them on Margin Scheme invoices


you will be able to sell them under the scheme.


the transferor bought them on invoices showing VAT


they are not eligible for the scheme and you will have to account for VAT on the full selling price when you sell them.


So it is in your own interest when you buy a business as a TOGC to

  • check the position with the seller, and
  • make sure that you have the records you need if the vehicles are eligible to be sold under the Margin Scheme.

11.3 What rules apply to banks and financial institutions?

If you are


then


  • a bank, or
  • a financial institution

and you have acquired eligible vehicles as a result of having been assigned the rights to them in hire purchase or conditional sale agreements


you can only use the Margin Scheme to sell those vehicles if the last person to obtain them – other than by way of an assignment of rights or a TOGC – would have been entitled to use the Margin Scheme.


Where there has been

  • a succession of assignments or TOGCs, or
  • a mixture of both

it is therefore the first person in that chain who must have been entitled to use the Margin Scheme.

11.4 What will my Margin Scheme purchase price be?

Your purchase price will be the price paid when the eligible vehicle was bought by the person in the chain who was entitled to use the Margin Scheme to sell it himself.

You will be able to identify the original purchase price from the purchase invoices which will form part of the business records.

When you buy a business as a TOGC, you must ensure that you have the necessary records to enable you to calculate a margin. You will always need the purchase invoices. You may enter the vehicles obtained under a TOGC into your own stock record if the original stock record is retained by the transferor of the business.

If:

  • you have obtained goods under a TOGC from a bank or financial institution, and
  • that body had obtained those goods when they were assigned the rights in a hire purchase or conditional sale agreement

the records which are usually kept in relation to these transactions should provide the necessary information.

Your rights and obligations

Your Charter explains what you can expect from us and what we can expect from you. For more information go to Your Charter.

Do you have any comments or suggestions?

If you have any comments or suggestions to make about this notice, please write to:

VATAPPS Compliance team
HM Revenue & Customs
1st Floor North West
Queens Dock
Liverpool
L74 4AA

Please note this address is not for general enquiries.

For your general enquiries please phone our VAT Helpline 0845 010 9000.

Putting things right

If you are not satisfied with our service, please let the person dealing with your affairs know what is wrong. We will work as quickly as possible to put things right and settle your complaint. If you are still unhappy, ask for your complaint to be referred to the Complaints Manager.

For more information about our complaints procedures go to www.hmrc.gov.uk and under quick links select Complaints.

How we use your information

HMRC is a Data Controller under the Data Protection Act 1998. We hold information for the purposes specified in our notification to the Information Commissioner, including the assessment and collection of tax and duties, the payment of benefits and the prevention and detection of crime, and may use this information for any of them.

We may get information about you from others, or we may give information to them. If we do, it will only be as the law permits to:

  • check the accuracy of information
  • prevent or detect crime
  • protect public funds.

We may check information we receive about you with what is already in our records. This can include information provided by you, as well as by others, such as other government departments or agencies and overseas tax and customs authorities. We will not give information to anyone outside HMRC unless the law permits us to do so. For more information go to www.hmrc.gov.uk and look for Data Protection Act within the Search facility.

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$START-DATA$ title=The VAT Margin Scheme on second-hand cars and other vehicles^ summary=VAT Notice 718/1: This notice explains how, when and why businesses who sell second-hand motor vehicles should use the VAT Margin Scheme.^ doctype=PublicNotice^ date=30-Sep-2011^ author=WJ6003075^ $END-DATA$
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