The VAT margin scheme on used vehicles: when it applies, how to work it out

Two treatments, not one

A used vehicle resold by a trader falls under one of two VAT treatments. Under the normal treatment, VAT applies to the whole selling price, and the VAT paid on purchase is deductible. Under the margin scheme, VAT applies only to the difference between the selling price and the purchase price, and nothing is deductible upstream.

The point to hold on to: this is not an option you pick vehicle by vehicle to optimise. The treatment follows from the nature of the acquisition.

When the margin scheme applies

The margin scheme, set out in article 297 A of the Code général des impôts, applies where the second-hand item was acquired from someone who did not charge VAT on that sale. In practice, three cases cover most of the trade:

• Buying from a private individual.
• Buying from a person not registered for VAT.
• Buying from another taxable dealer who themselves applied the margin scheme.

Conversely, a vehicle bought from a company with VAT charged and deductible falls under the normal treatment on resale. That is the common case with company cars and fleet buy-backs.

The calculation

The margin is a figure that already includes tax: the VAT has to be extracted from it, not added to it. At the standard 20% rate, the formula is:

A worked example, checkable on a calculator: a vehicle bought for €12,000 from a private individual and resold for €14,400 produces a margin of €2,400. The VAT due is 2,400 × 20 ÷ 120, that is €400. The net margin left to the trader is therefore €2,000.

The classic mistake is to work out 20% of the margin, which would give €480 instead of €400: the margin you take in already includes the tax.

What the invoice must say — and must not

Under the margin scheme, the invoice does not show VAT. Putting a VAT amount on a sale under this scheme would give the buyer a right to deduct that does not exist.

The invoice must, however, carry the statement of the special scheme applied to second-hand goods, as required by article 297 E of the Code général des impôts. That statement is not decorative: it is what tells a trade buyer they will not be able to deduct anything.

The trap in reconditioning costs

A vehicle taken in at €12,000 and reconditioned for €800 does not have a purchase price of €12,800 for the purposes of the margin calculation. Preparation costs are not added to the acquisition price: they remain operating costs, with their own VAT deductible under the ordinary rules.

The consequence is as much accounting as tax: the taxable margin and the commercial margin on a vehicle are not the same thing. Tracking one while believing you are tracking the other distorts how profitable each vehicle looks.