Used Car Margin VAT Scheme

Used Car Margin VAT Scheme – How does it work?

Many of our customers and prospective customers ask us, “How is Margin VAT calculated?” In the DragonDMS, this is automatically worked out for you, however, we thought we would explain the full process for car dealers without our Dealer Management System. We hope this helps!

The Margin VAT rules for normal used car transactions are as follows:

Take the original buying price of the vehicle and subtract this from the selling price of the vehicle, this will give you your profit margin. Margin VAT is 20% of the profit margin. The Dragon2000 Dealer Management System calculates this for you, but here is a worked example which shows the process along with an idea of how it is intended to be used:

Example:

Buying Price – £10,000.00 Selling Price – £11,000.00 Gross Margin – £1,000.00

Now, to calculate the Margin VAT payable, take the Gross Margin and divide by 6

£1,000 / 6 = £166.67

Note that it’s not £1000 + VAT (That would be £200) The buying price and the selling price used to calculate your Gross Margin, and thus Margin VAT, are the ‘raw’ prices. This means that no reconditioning is taken into account in the buying price, and RFL, Warranty and any other extras are excluded from the selling price.

Reclaiming VAT on reconditioning costs

You can reclaim the VAT on any reconditioning costs you incur if the company you used for the work charged you VAT. An example would be if Joes Bodyshop charged £200 + VAT for some paintwork, in which case you would reclaim the £40.00 Vat that he charged you. You cannot however, paint the car yourself, estimate the charge to be £200 and reduce the purchase price of the car by that amount. (You would of course be able to reclaim the VAT on the aerosols that you bought to complete the job!!)

Similarly, when you sell the car, if you include the road fund licence in the deal at say £10,160.00, remember to subtract the cost of the RFL to arrive at the Selling Price. (e.g. £10,160.00 – £160.00 giving a Selling Price of £10,000.00) If you make a loss you don’t pay any VAT but you can’t reclaim any VAT on margin that you didn’t make. Neither can you add up all the profits and net off any losses over a batch of cars or over a trading period.

Why the yellow warning?

Over the years we’ve seen ‘creative’ interpretations on the rules from both used car dealers and some of our competitors’ software. DragonDMS is constantly under review from both ourselves and HMRC inspectors to ensure that it complies with the legislation – for eighteen years and counting…. For a more comprehensive explanation, you should read the following VAT notice: Notice 718 – Margin Schemes

Dragon2000 have been helping dealers and garages drive their businesses forward since 1995. Talk to our team today on 01327 222 333 or email sales@dragon2000.co.uk to find out how our dealer management system, car dealer websites and mobile apps can help your business increase profits and reduce costs.