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    Is there VAT on second-hand cars?

    car dealership in the UK

    Whether VAT is charged on a second-hand car depends on who you buy from. Private sellers don’t charge VAT (Value Added Tax), but dealers might. 

    Most dealerships use the VAT Margin Scheme, meaning you only pay VAT on the dealer’s profit margin, not the full sale price. It’s important to understand how VAT works when buying second-hand cars to avoid any nasty surprises and ensure you’re aware of any additional costs. 

    Read on to learn more.

    VAT with new and used cars

    audis and range rovers for sale
    You will likely be charged VAT when you buy a used car through a dealership.

    Standard VAT rates for new vehicles

    The standard VAT rate for new vehicles in the UK is 20%. This is added to the total purchase price and is usually included in the listed price for new cars sold by dealerships. 

    Businesses registered for VAT may be able to reclaim it, but private buyers cannot. It applies regardless of whether the vehicle is for personal or business use or not.

    Differences between new and second-hand car VAT implications

    VAT implications differ between new and second-hand cars. As mentioned, a 20% VAT is included in the total price for new vehicles, but for second-hand cars, VAT depends on the seller. 

    Private sellers don’t charge VAT, while dealerships may use the VAT Margin Scheme. In this scheme, VAT is only applied to the dealer’s profit, not the entire sale price.

    Remembering VAT can help you budget and avoid unexpected costs.

    What is the second-hand margin scheme

    Who’s eligible?

    The VAT Margin Scheme is available to VAT-registered dealers selling second-hand vehicles. To qualify, the car must be second-hand, and the dealer must have acquired it without reclaiming VAT, typically from

    👍 A private individual

    👍 Another dealer,

    👍 At auction

    New cars or those bought VAT-free aren’t eligible for this scheme. Dealers must meet strict record-keeping requirements to use the VAT Margin Scheme, ensuring the correct tax is applied only to their profit margin.

    How the scheme affects the final price you pay

    Under the VAT Margin Scheme, VAT only applies to the dealer’s profit margin and not the full sale price. This can reduce the amount of VAT you indirectly pay as a buyer. The dealership handles the VAT calculation which can result in a more competitive price compared to paying VAT on the entire vehicle’s cost. 

    However, VAT is still included in the final cost, so it’s important to understand the scheme to avoid any hidden surprises.

    VAT implications of buying from a dealer

    How VAT applies to dealership sales

    As already discussed, when buying from a dealership, VAT can be applied to the full sale price or just the dealer’s profit, depending on the car and the VAT scheme used. New cars attract 20% VAT on the total price, while second-hand vehicles sold under the VAT Margin Scheme only have VAT charged on the profit margin. 

    Dealerships will usually include this in the advertised price, so buyers don’t pay it separately at the point of sale.

    Important questions to ask your dealer regarding VAT

    To avoid surprises, ask your dealer about VAT upfront. Key questions include: 

    🤔 Is VAT included in the advertised price?

    🤔 Are they using the VAT Margin Scheme? 

    🤔 Does the VAT apply to the full price or just the margin?

    Asking these questions will determine whether the vehicle qualifies for VAT, and how it’s calculated, and ensures you’re fully aware of any additional costs before committing to a purchase.

    What you need to know when buying from a private seller

    VAT implications when buying from an individual

    As stated, private sellers are not VAT-registered, so VAT does not apply when purchasing a second-hand car from them. This often makes buying from individuals cheaper than buying from a dealer. 

    However, it’s important to remember that without VAT, you won’t have the same protections as with a dealership sale. So, additional precautions may be necessary to ensure a fair transaction.

    Tips for due diligence in private transactions

    When buying a car privately, there is some due diligence you should carry out:

    👍 Verify the car’s history using services like an HPI check, ensuring it’s not stolen or under finance. 

    👍 Carefully inspect the vehicle’s condition and ask for full service records. 

    👍 Arrange a test drive and, if possible, have a mechanic assess the car. 

    👍 Confirm the seller’s identity and make sure the Vehicle Registration Document (V5C) matches their details.

    Thinking of buying a used car?

    Got your eye on a second-hand car but not sure you know all you need to know about buying it? Worry no more! Our guides on purchasing used vehicles will help you avoid getting stung when it comes to handing over your money.

    FAQs

    Do car dealers have to pay VAT?

    Yes, car dealers pay VAT on new cars at 20% of the sale price. For second-hand cars, they use the VAT Margin Scheme, paying VAT only on their profit margin, not the full sale price.

    Can a company reclaim VAT for a second-hand car?

    No, companies cannot reclaim VAT on second-hand cars purchased from private sellers. However, if bought from a VAT-registered dealer using the VAT Margin Scheme, they cannot reclaim VAT on the purchase price but may still claim VAT on any related business expenses.

    Thinking of buying a used car?

    Got your eye on a second-hand car but not sure you know all you need to know about buying it? Worry no more! Our guides on purchasing used vehicles will help you avoid getting stung when it comes to handing your money over.

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