Q – We are a recruitment business and have just bought a second hand car from a VAT registered dealer but there is no VAT on the sales invoice. Can VAT still be reclaimed even though no VAT figure is shown?

A – The sale of the car by the VAT registered dealer has almost certainly been made using, what is known as, the “second- hand margin scheme”. This is where the dealer has say taken the car as part exchange against the sale of another to a private individual. The scheme allows the dealer to only declare VAT on the profit margin achieved. This means that although the purchase of the car is from a private individual, the dealer achieves effective “input tax” relief.

A condition of the scheme is that no VAT figure is shown on the invoice. Another condition of the scheme is that the invoice should also have the declaration “This is a second-hand margin scheme supply” A business buying such a car cannot reclaim VAT on the purchase, simply because no VAT is shown on the invoice. VAT would only be shown if the dealer themselves purchased the vehicle plus VAT and reclaimed that VAT as input tax.

All is not lost however, as the business when it eventually sells the car, can themselves sell it under the second-hand margin scheme. This again means that VAT need only be declared on any profit margin achieved. Given that in most circumstances the future sale will be at a loss, no VAT will be payable. If however a business does make a profit on the sale the amount of VAT payable would be determined by deducting the purchase price from the sales price and dividing the profit by a sixth (a sixth is the current “VAT fraction”, which when applied to a VAT inclusive figure determines the amount of VAT in the inclusive value).

The scheme can be used for most second hand goods and a detailed breakdown of the scheme’s operation can be obtained from HMRC’s website in VAT Notice 718 – VAT and the Second –Hand Margin Scheme. A link is provided below; http://www.hmrc.gov.uk/vat/start/schemes/margin.htm

The recruitment business should also bear in mind that even had VAT been shown on the sales invoice that it could only be reclaimed as input tax if the vehicle was not “available” for private use. In general this would mean only VAT on pool cars; one not allocated to an individual and which is retained on the business premises overnight, could be reclaimed.

If anyone has any further queries on this topic call the VAT Helpline on 01455 852 555 and press option 2.