Selling a car that has been used in your business often raises a simple question with a not so simple answer. Do you need to charge VAT on the sale?
At Nordens, this is something we are asked about regularly, often after a sale has already taken place. The challenge is that VAT on vehicle disposals does not work on assumptions. The correct treatment depends entirely on how the car was originally acquired and whether VAT was recovered at that point.
Getting this wrong can result in undercharged VAT, incorrect invoices, or unnecessary exposure to HMRC enquiries. Understanding the rules before the sale takes place can help avoid costly mistakes.
Who this applies to
This guidance is particularly relevant if you:
- run a VAT registered business or limited company
- have sold or plan to sell a company car or van
- have leased a vehicle that was later purchased
- are replacing business vehicles or restructuring assets
The key principle to understand
Across all scenarios, one principle applies.
The VAT treatment when a car is sold always follows the VAT treatment when it was acquired.
It does not matter how long the vehicle has been owned, how much VAT was paid at the time, or whether VAT was recovered on related costs such as leasing. Everything comes back to whether VAT was actually recovered when the car entered the business.
Once this principle is clear, the next step is identifying which category your vehicle falls into.
When VAT was recovered on purchase
In some cases, a business is allowed to recover VAT when buying a car. This is most common where the vehicle is used exclusively for business purposes, such as a driving school car or a genuine pool car.
Where VAT was recovered on purchase, VAT must be charged on the full selling price when the car is sold. HMRC treats this as a standard rated supply. If the buyer asks for one, a valid VAT invoice must be issued.
In these circumstances, the second-hand margin scheme cannot be used because VAT was recovered at the point of acquisition.
When VAT was blocked on purchase
For most company cars, VAT is charged by the seller but cannot be reclaimed by the business. Input tax on cars is generally blocked unless very specific conditions are met.
Where VAT was blocked on acquisition, the sale of the car is exempt from VAT. No VAT should be charged on the selling price and no VAT invoice can be issued. Any VAT incurred on costs linked to the sale is treated as exempt input tax.
This point often causes confusion. Many business owners assume that because VAT was paid on purchase, VAT must be charged on sale. In reality, what matters is not whether VAT was paid, but whether it was recovered.
Cars purchased under the VAT margin scheme
If a business buys a car from a margin scheme dealer, VAT is not shown on the invoice and no VAT can be reclaimed. Provided the conditions are met, the margin scheme may also apply when the business sells the car.
In this case, VAT is due only on the margin, being the difference between the purchase price and the selling price. The rules around the margin scheme are strict, and it cannot be applied simply by choice. The original acquisition must qualify.
Commercial vehicles and vans
Commercial vehicles are not treated as cars for VAT purposes, so different rules apply. In most cases, where VAT was recovered on the purchase of a commercial vehicle, VAT must be charged on the full selling price when it is sold.
Where VAT was not recoverable, the margin scheme may be available, depending on how the vehicle was originally acquired.
Selling a vehicle outside the UK
Where a vehicle is sold for export outside the UK, the sale may be zero rated for VAT. However, HMRC requires clear evidence that the vehicle has left the UK within the required time limits. Without the correct documentation, zero rating may be refused.
Leased cars that are later purchased
One of the most common areas of misunderstanding we see at Nordens involves leased cars that are later bought and sold.
During a lease, a business can normally recover 50% of the VAT charged on lease payments. This partial recovery applies only to the leasing service, not to the vehicle itself.
When the car is purchased from the leasing company at the end of the lease, VAT is usually charged on the sale price. However, this VAT is blocked and cannot be reclaimed because the transaction is treated as a car purchase.
If the business later sells the car, the sale is exempt from VAT. No VAT should be charged, no VAT invoice should be issued, and the margin scheme cannot be used because the car was acquired from a VAT registered business that charged VAT.
This often surprises business owners who have been recovering VAT on lease payments for several years. However, the VAT position on sale always follows the VAT position on acquisition of the asset.
A practical example
A business leases a car for three years and recovers 50% of the VAT on each monthly lease payment. At the end of the lease, it purchases the car for £8,000 plus VAT but cannot reclaim the VAT on that purchase. Six months later, the car is sold for £10,000.
Although VAT was paid when the car was purchased, it was not recoverable. As a result, the sale of the car is exempt from VAT and no output VAT is due.
Why getting this right matters
Selling a business vehicle is often part of a wider transaction, whether that is replacing an asset, restructuring, or preparing for a business sale. Applying the wrong VAT treatment can create avoidable liabilities and administrative issues.
HMRC frequently reviews vehicle disposals during VAT inspections, particularly where VAT has not been charged on sale. Taking the correct approach from the outset can help reduce risk and avoid time consuming challenges later.
How Nordens can support you
At Nordens, we regularly support businesses with the VAT treatment of vehicle sales, whether as part of routine asset disposals or wider planning.
- review how a vehicle was originally acquired and confirm the correct VAT treatment on sale
- advise on whether VAT should be charged, exempt, or accounted for under the margin scheme
- ensure invoices are issued correctly and VAT returns reflect the disposal accurately
- support businesses that are partially exempt or selling vehicles as part of a larger transaction
Taking advice before a vehicle is sold can help avoid errors, delays, and unnecessary exposure to HMRC enquiries. If you are unsure how VAT applies to your situation, our team is on hand to guide you through the process with clarity and confidence.
