Other products and circumstances affecting the second-hand vehicles VAT margin scheme
If you buy or sell second-hand vehicles, find out how other products and circumstances affect the scheme and how you account for VAT. (VAT Notice 718)
Other products and circumstances can affect how you work out your margin if you use this VAT margin scheme.
The supply of a warranty or a linked ‘insurance’ product under any other type of scheme is standard-rated.
Linked insurance products
A linked insurance product is a contract of insurance between an insurer and the purchaser of a vehicle. The contract will provide cover against particular risks.
Linked insurance products include:
- mechanical breakdown insurance
- guaranteed asset protection
- key, wheel and tyre cover
- paint and fabric damage cover
If you provide your customer with a ‘free’ linked insurance product
The selling price must include the cost for supplying the product.
Your invoice must show that:
- no separate charge is being made for the linked insurance product
- the price of the vehicle is the same as your stockbook
If you arrange linked insurance products for your customer to purchase
You’re acting as an agent of the insurance company and how you account for VAT depends whether any risk covered by the insurance policy is yours or your customer’s.
When the charge is exempt
The supply is exempt if it meets 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 free to purchase the vehicle without the insurance product
- you disclose the insurance premium and any other amount (fees or commission) being charged
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.
When the charge is 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 on the vehicle
- standard-rated ‘insurance’ charge
Linked insurance products in more complicated circumstances
If you:
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negotiate a reduced price for the vehicle (including the linked insurance product), the exempt premium payable for the linked insurance product remains unchanged.
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supply of an upgraded linked insurance product with an increased premium, you must itemise the product separately and show the increased exempt premium.
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advertise the vehicle and the linked insurance product at a single price and you do not disclose the amount of the premium, any fee or commission you receive in relation to the insurance is standard-rated — the net premium paid to and retained by the insurer remains exempt.
You must show the selling price of the vehicle, net of the insurance, in your stockbook.
The value shown on the sales invoice for the vehicle must be the same as your stockbook.
Warranties
A warranty is an undertaking or guarantee that you give to your customer. If goods prove to be faulty within a specified time or mileage limit, you will bear the cost of providing the appropriate repairs or replacement parts.
If you make a separate charge for a warranty
The charge will be standard-rated and your selling price for 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 scheme
- standard-rated charge for the warranty outside the scheme
The value shown on the sales invoice for the vehicle must be the same as that entered in your stockbook.
If you provide your customer with a ‘free’ warranty
The selling price must include the cost for supplying the product.
Your invoice must show:
- that no separate charge is being made for the warranty
- the price of the vehicle is the same as your stockbook
If you sell a second-hand vehicle with an MOT
If you sell a second-hand vehicle with an MOT, you’re making a single supply.
You must record the full selling price, including the MOT, in your stockbook and use this figure for calculating the margin.
Road fuel licence
If you buy a vehicle for resale 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 the refund.
If you 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 and you must include the value of the licence in the selling price entered in your stockbook.
If you 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.
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.
If you take a vehicle as part exchange
Selling price
If you sell an eligible vehicle and take another in part-exchange, you must not reduce the selling price by the value of the part-exchanged vehicle.
Purchase price
If your customer is VAT registered they must issue you with a sales invoice.
You must check that the vehicle you take in part-exchange is eligible to be sold on under the margin scheme and include the vehicle details in your stockbook.
If you over-allow on the value of the vehicle you have taken in part-exchange, your purchase price must be the one you agreed with your customer and which appears on the sales invoice.
If your customer is not registered for VAT and you buy from a private person or business, you may include the details of the part-exchange vehicle on your sales invoice provided all requirements 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.
If you have hire purchase sales
If you sell an eligible vehicle and arrange hire-purchase with a finance company on behalf of your customer, then you’re deemed to be selling the vehicle to the finance company.
What records you need to keep
You must transfer the sale price of the item from the hire-purchase documentation to your stockbook.
If you have issued your own sales invoice to your customer, and you have a copy of the HP agreement, you must either:
- attach a copy of the completed HP agreement to the sales invoice
- include a cross-reference to the HP agreement in your sales records
If the finance company holds the hire-purchase agreement , and you do not get a copy of it for your records, you must keep a copy of the agreed quotation, or the agreed proposal documents in your sales records, together with:
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the name of the finance company
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the date and reference number of the final agreement
You may use a copy of the hire-purchase agreement as your sales invoice providing it shows:
- all the identifying details of the item
- the cash price of the item as the gross price payable
The gross price includes the following:
- the amount borrowed
- any cash deposit paid
- any amount allowed for a part-exchange item
You must not show VAT separately on the hire-purchase agreement and customer’s sales invoice.
If you obtain a vehicle under a transfer of going concern or an assignment of rights
If you obtain vehicles under a transfer of a going concern, 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 can use the scheme if the last person to obtain the vehicles, other than by way of a transfer of a going concern or an assignment of rights, would have been entitled to use the margin scheme to sell them.
If there has been a succession of transfer of going concerns or assignments or a mixture of both, it’s the first person in the chain who must have been entitled to use the margin scheme.
What records you need to keep
The seller of a transfer of a going concern must:
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keep the records, but make them available to the buyer so that they can follow the VAT rules
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transfer the records to the buyer if they apply to HMRC for information/permission to take on the seller’s VAT number
The records should include the purchase invoices for stock on hand.
Use these invoices to work out if the vehicles are eligible to be sold under the second-hand vehicle scheme.
If the transferor invoices show VAT was charged, then:
- they are not eligible for the scheme
- you must account for VAT on the full selling price
Rules that apply to banks and financial institutions
If you acquire eligible vehicles as a result of being assigned the rights to them in hire-purchase or conditional sale agreements, then you can only use the second-hand vehicle margin scheme to sell the vehicles if the last person to obtain them, other than by way of an assignment of rights or a transfer of a going concern, was entitled to use the scheme.
If there has been a succession of assignments or transfers of a going concern, or a mixture of both, it is the first person in the chain who must have been entitled to use the margin scheme.
Work out the purchase price
The purchase price is the price paid for the vehicle when it was bought by the person in the chain who was entitled to use the margin scheme to sell it themselves.
The original purchase price should be on the purchase invoice in the business records.
You must make sure that you:
- have the necessary records, including the purchase invoice so you can calculate a margin
- enter the vehicles obtained under a transfer of a going concern into your own stock record if the original stock record is retained by the transferor of the business