Why Part-Exchange Complicates the Margin Scheme

Under the VAT Margin Scheme, you only pay VAT on the profit you make on a sale, not the full selling price. Most dealers have got that part down.

Part-exchange is where it gets trickier, and a lot of guides skip over this. When two vehicles change hands in the same deal, the car you’ve taken in doesn’t just vanish from the sums. It becomes new stock in its own right, which means you have to work out the VAT when you sell it on.

A Simplified Example

Say you bought a car into stock for £9,500. You sell it to a customer for £12,000, and they part-exchange their own car against it at an agreed £4,000, paying you £8,000 in cash.

On the car you’ve just sold: the margin is £12,000 − £9,500 = £2,500, so the VAT due is £2,500 ÷ 6 = £416.67.

The part-exchange car doesn’t get folded into that same sum. It joins your stock at the value you agreed to give for it, £4,000. Sell it on later for, say, £5,200, and the margin on that sale is £5,200 − £4,000 = £1,200, with £200 VAT due.

The Compliance Point HMRC Cares About

The trade-in value you use in that second sum has to be the same figure you agreed with the customer and put on their invoice at the time. HMRC and the tax tribunals have been consistent on this: what counts is the value shown to the customer at the point of sale, not a record created later on.

In practice, that just means agreeing a fair trade-in value at the time of every deal, and recording this consistently on the invoice, the stock book and the accounts. It’s a small habit, but one of the most important to help you remain compliant.

How We Can Help

We believe in warding off problems before they happen. We can check your records for accuracy and make sure your stock book is correct, giving you peace of mind that everything’s in order.

We’ll also make sure you’re not quietly overpaying, or underpaying, VAT on part-exchange deals. We’ve even designed our own software, Motor Metric, to help us keep on top of this for our clients if they don’t have a suitable system or are having problems with their software. And we’ll keep you up to date with any changes to HMRC’s paperwork rules. That’s one less thing to think about, so you can focus on building your business. 

Speak to a specialist motor trade accountant today

We’ve been advising motor trade businesses for over 30 years. To find out how we can take the worry off your plate, call 01603 904131 or email enquire@themotortradeaccountants.co.uk

Want more practical, jargon-free advice? Grab a free copy of our brochure, ‘5 Expensive Mistakes that Could Put the Brakes on Your Motor Trade Business’