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.

That's true in general, unless:

a) the seller is not VAT-registered, so he cannot reclaim any VAT suffered on purchases

or

b)he correctly charges VAT on sales but has purchased goods not attracting VAT, eg if purchased from a non-VAT registered business or a private individual.

VAT recovery by companies only applies to a small group of companies - the only companies that can reclaim VAT on car purchases are those engaged in the "car industry" not companies that run cars as part of their business as architects, engineers, sales agents.

Qualifying companise that can reclaim the VAT include - car manufacturers, garages, car leasing companies, driving schools, .........................