In a recent VAT Tribunal case, the First-tier Tax Tribunal ruled against RSK Cars Limited, finding that the company was not entitled to use the VAT margin scheme for its second-hand vehicle sales.

The business bought cars and light vehicles from various suppliers before selling them mainly to members of the public. It accounted for output tax on the profit margin rather than the full selling price. However, HMRC challenged the company’s use of the scheme after identifying serious gaps in its records, including the absence of a second-hand stock book and missing purchase and sales invoices.

The record-keeping requirements for the margin scheme are not optional. HMRC’s published guidance makes clear that businesses must keep specific records, including evidence to support margin calculations on each individual sale.

The Tribunal found that RSK Cars Limited had failed to keep the required stock book,calculated margins by quarter rather than by vehicle, and failed to retain purchase invoices. It also identified unsupported commission-based sales, further weakening the company’s position. Despite repeated HMRC requests following a June 2022 enquiry, the company and its representatives failed to provide the necessary documentation or comply with Tribunal directions.

The Tribunal agreed with HMRC, concluding that the company had not met the statutory conditions for using the VAT margin scheme. Its systemic documentation failures meant that the margin calculations could not be verified.

The importance of accurate record keeping and VAT treatment

The ruling reinforces a clear message for VAT-registered second-hand traders: the VAT margin scheme is only available where strict documentation rules are followed. It is not enough for a business to calculate VAT on a margin basis; it must also be able to evidence, clearly and consistently, that it has met the conditions of the scheme.

Businesses must maintain a detailed stock book, retain original purchase invoices, calculate margins accurately for each vehicle rather than on an aggregated basis and keep full supporting evidence for commission-based sales.

Accurate records are central to demonstrating compliance. Where documentation is missing, incomplete or inconsistent, HMRC may reject use of the margin scheme and assess VAT on the full selling price instead. This can lead to substantial VAT assessments, penalties, interest and reputational damage.