Using the VAT margin scheme for hire-purchase and part-exchange goods
How to account for VAT using the VAT margin scheme for hire-purchase sales and part-exchange goods.
There are special rules to follow if you arrange hire-purchase agreements on behalf of your customers or accept goods in part-exchange.
How to deal with hire-purchase sales
If you sell an eligible item and arrange hire-purchase terms with a finance company on behalf of your customer, then you’re deemed to be selling the item to the finance company.
No VAT is due on the finance charges, provided these are itemised separately.
Sales records you need to keep
You must transfer the sales price of the item from the hire-purchase agreement to your stock book.
If you have issued your own sales invoice to your customer, and you have a copy of the hire-purchase agreement, then you must either:
- attach a copy of the completed hire-purchase agreement to the sales invoice
- include a cross-reference to the hire-purchase agreement in your sales records
The finance company may hold the hire-purchase agreement. If you do not get a copy of it, you must keep the following with your sales records:
- a copy of the agreed quotation
- the agreed proposal documents
- the name of the finance company
- the date
- the reference number
You may use a copy of the hire-purchase agreement as your sales invoice, provided it shows:
- all the identifying details of the item
- the cash price of the item as the gross price payable
The gross price is the amount borrowed plus any cash deposit paid, plus any amount allowed for a part-exchange item.
VAT must not be shown separately on either the:
- hire-purchase agreement
- customer’s sales invoice
Part-exchange goods
The selling price on which you calculate your margin must include the value of the part-exchanged goods if you both:
- sell eligible goods
- accept other goods in part-exchange
Example 1
For example, you sell a boat for £2,500 for which you paid £1,500.
However, you also take another boat in part-exchange which you value at £500 and the customer only hands over a balance of £2,000. The selling price you insert in your stock book must be £2,500 and you must account for VAT on the full margin of £1,000.
If the part-exchange boat is eligible for the margin scheme, you must include its details on the purchase side of your stock book. Your purchase price would be £500. You must not alter this purchase price.
Your customer may want to negotiate a different part-exchange price. Your purchase price for the purposes of the margin scheme must be the one you agreed with your customer, and which appears on the sales invoice.
Example 2
For example, you sell a car for £3,500 which you bought for £2,000.
You take a car in part-exchange for which you allow £800, so the customer pays the balance of £2,700. However, the book value of the part-exchange is only £600.
The purchase price in your margin scheme stock book must be £800.
If you obtain the part-exchange goods from:
- another VAT-registered dealer, then you must obtain a purchase invoice for the goods
- a private person or unregistered dealer, then you may include details of part-exchange items on your sales invoice
How to work out the margin and VAT due
You should work out the margin and VAT due following the normal margin scheme calculation.
Records to keep
You should keep the normal VAT margin scheme records.
Further information
You must show any goods you buy or sell using a margin scheme on your VAT return.