When you buy a new commercial vehicle, you will pay 20% VAT on the purchase price and in most cases this VAT can be reclaimed. This assumes of course, that the motor trader selling you the vehicle is VAT registered.
If you purchase a second-hand commercial vehicle there are three VAT options:
The second-hand dealer is not registered for VAT and therefore, you will not be charged VAT.
The second-hand dealer is registered for VAT and only charges you VAT on the profit he is making on the sale under the VAT margin scheme, in which case you will not be provided with a VAT invoice and you cannot reclaim the VAT charged.
The second-hand dealer is registered for VAT and charges you VAT at 20% on the sale price. In this case you will get a VAT invoice and can reclaim the VAT charged.
Let’s say that Jerry is looking at a second-hand van at his local dealers that has a sales price of £20,000. Primed by his accountant, he asks if the VAT included is calculated under the margin scheme.
After a hasty conversation with their accounts department, the rather flustered sales person says “yes, it is,” and after more enquiries Jerry is advised that the VAT element is £700. Jerry switches on his phone accesses the calculator, taps in £700 divides by 20 and multiplies by 100. The number £3,500 emerges.
Jerry knows that he cannot recover this £700 and he also knows that the dealer will have to pay the £700 out of his profit margin. Armed with this information, Jerry asks if he can pay outside the margin scheme, and more importantly, could he and dealer split the £700 saved by dropping the sales price to £19,650 plus VAT at 20%.
In this way, the dealer will collect and pay the VAT added of £3,930 and will receive £19,650 for the van instead of £19,300 (£20,000 less the £700 margin scheme VAT).
Jerry will have to pay out £23,580 initially but will be able to claim back the full £3,950 of VAT and will have acquired the van for £19,650 instead of £20,000.
The dealer accepts. A classic win-win outcome.