Dealers account for VAT on second hand cars one of 2 ways:
1. If a car is a VAT qualifying car (i.e. was first purchased by a VAT registered organisation) then VAT is included in the purchase price (to the dealer) and the sales price to the customer.
For example: A dealer buys a VAT qualifying car for £11,750, being £10,000 + VAT and then sells it to a customer for £14,000, being £11,915 + VAT. The difference between the VAT on the purchase and the sale is paid to HMRC.
VAT on £10,000 is £1,750. VAT on £11,915 is £2,085. Therefore VAT payable to HMRC is £2,085 - £1,750 = £335
2. If a car is a non-qualifying car (i.e. has at some point been sold to a non-VAT registered organisation) then VAT is deducted from the vehicle margin .
For example: A dealer buys a non-qualifying car for £11,750 and then sells it to a customer for £14,000. VAT is payable out of the difference between £14,000 and £11,750, being £2,250.
£2,250 * .175 / 1.175 = £335
HMRC receive the same amount of VAT irrespective of the car being VAT qualifying or non-qualifying.
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