Do You Pay VAT on Second-Hand Cars?

VAT on second-hand cars depends on how it’s sold. Learn the difference between margin scheme and VAT qualifying used vehicles, and what to ask dealers.

When buying a used car, many buyers are unsure whether VAT is included in the price. Unlike new cars, where VAT is clearly charged at 20%, second-hand vehicles are subject to different rules depending on who is selling the car and how it was previously used.

This guide explains the VAT implications of buying second-hand cars, including the difference between VAT-qualifying and margin scheme vehicles, how to check what you're paying, and what to ask your dealer.

What’s the Difference Between New and Second-Hand Car VAT?

New cars always have VAT added at the standard rate of 20%. It is listed separately on the invoice and reclaimable if the buyer is a VAT-registered business using the car for eligible purposes.

With second-hand cars, the VAT position is less straightforward. It depends on:

  • Who is selling the car (dealer, private seller, business)

  • How the vehicle was purchased by the seller

  • Whether the car has previously been part of the VAT system

VAT on a Used Car from a Dealership

When buying from a VAT-registered dealership, you may encounter two types of pricing:

  • VAT Qualifying – VAT is charged on the full selling price. A business buyer may be able to reclaim this if used exclusively for business.

  • Margin Scheme – VAT is only applied to the dealer’s profit margin and not itemised on the invoice. You can’t reclaim VAT in this case.

Most second-hand vehicles are sold under the margin scheme, which simplifies VAT for the dealer and typically keeps the price lower for private buyers.

What Is the Second-Hand Margin Scheme?

The second-hand margin scheme allows dealers to account for VAT only on the difference between what they paid for the car and what they sold it for. It is intended for goods where VAT was already paid in full on an earlier sale, such as from private individuals or non-VAT-registered sellers.

The buyer under this scheme does not see VAT listed on the invoice and cannot reclaim VAT, even if they are a business.

Who’s Eligible to Use the Margin Scheme?

Only VAT-registered dealers can use the margin scheme. It is not available for private individuals or non-VAT registered traders.

The vehicle must have been bought in a way where no VAT was reclaimed – usually from private sellers or businesses that are not VAT-registered.

How the Scheme Affects the Final Price You Pay

Under the margin scheme, the VAT element is absorbed into the selling price, meaning the dealer pays it to HMRC but does not show it on your invoice.

This usually results in lower prices for buyers, but also means the vehicle is not VAT qualifying, so the VAT element is locked into the transaction.

How to Calculate VAT on a Used Car

If a car is VAT qualifying, the VAT will be 20% of the net price and shown clearly on the invoice. Example:

  • Net price: £10,000

  • VAT: £2,000

  • Gross price: £12,000

If the car is sold under the margin scheme, there is no standard method for calculating VAT from the gross price because it depends on the dealer's profit.

How VAT Applies to Dealership Sales

Dealerships should clearly state whether a second-hand car is:

  • VAT qualifying

  • Sold under the margin scheme

They must also provide a VAT invoice if VAT is charged and reclaimable. Always ask for clarification, especially if you’re a business customer planning to recover the VAT.

What About VAT on Pre-Registered or Nearly New Cars?

Pre-registered cars are often VAT qualifying, as they’ve been registered by the dealer or manufacturer but not previously sold to the public. These cars are typically still within the VAT system.

If buying a nearly new or demonstrator car, ask whether it’s VAT qualifying. If it is, and you’re VAT registered, you may be able to reclaim the VAT.

Important Questions to Ask Your Dealer Regarding VAT

  • Is this vehicle VAT qualifying or sold under the margin scheme?

  • Will I receive a VAT invoice?

  • Is VAT included in the advertised price?

  • Can I reclaim the VAT if I’m VAT registered?

Dealers should be upfront about the VAT status of the car, especially in business transactions.

VAT Implications When Buying from an Individual

If you buy a used car from a private seller, there is no VAT involved. The car was not part of a VAT-registered sale, and the seller is not charging VAT.

This also means you cannot reclaim VAT, even if you’re a business, and the car will no longer be VAT qualifying for future sales.

Tips for Due Diligence in Private Transactions

  • Get a receipt confirming the seller’s details and sale amount

  • Check the vehicle history and mileage

  • Confirm the seller is not acting as a trader (which would raise VAT issues)

  • Understand that no VAT means no VAT invoice and no VAT recovery

Final Thoughts

VAT on second-hand cars depends entirely on how the car is sold. Most used cars are sold under the margin scheme and do not allow for VAT reclaims. If you’re a business buyer and want to reclaim VAT, look specifically for VAT qualifying vehicles sold with a proper VAT invoice.

When in doubt, always ask the seller to clarify the VAT status before committing to a purchase. This ensures transparency, especially if you need to factor VAT into your budget or accounts.