What Taxes Do Car Dealers Need to Pay in the UK?
One thing that often trips up car dealers is taxes. It’s very easy to get confused by the different taxes, deadlines, and rules that apply.
If you miss deadlines or misunderstand your tax responsibilities, it can result in fines, penalties, or even audits that consume your time and money.
That’s why it’s essential to understand which taxes apply to your dealership and how to manage them effectively.
In this blog post, we’ll break down the key taxes that affect UK car dealers and show you what you need to know to keep your business on the right track.
What Taxes Do Car Dealers Need to Pay in the UK
What Taxes Apply to Car Dealerships in the UK?
Most dealers will deal with a few main taxes: VAT, corporation tax, or income tax (depending on your business setup), and employer taxes if you have staff.
VAT is a big one, especially for used car dealers, because there’s a special VAT Margin Scheme that lets you pay VAT only on your profit, not the full price of the car. It helps, but you do need to keep good records.
If your business is a limited company, corporation tax is what you’ll pay on your profits. For sole traders or partnerships, income tax is what matters. And if you have employees, you’ll need to manage PAYE and National Insurance contributions.
Also, don’t forget about vehicle tax - that’s the road tax you pay on cars you keep on the road.
Getting clear on these taxes might seem tricky at first, but once you understand them, you’ll have a much easier time keeping your dealership’s finances in order and staying on the right side of the HMRC tax rules.
How Does VAT Work for Used Car Dealers?
In the UK, most used car dealerships use the VAT Margin Scheme, which means you only pay VAT on the profit margin, not the full sale price of the car. This scheme is designed to avoid double taxation since VAT was already paid on the car when it was first sold.
To use this scheme properly, you’ll need to keep detailed records of your purchases and sales. That includes invoices, purchase details, and sales receipts. It’s important to keep everything organised because HMRC checks these records regularly.
If your dealership sells new cars or vehicles that don't qualify for the Margin Scheme, the normal VAT rules apply, meaning VAT is charged on the full selling price. That’s why knowing which cars qualify for the scheme is vital.
Additionally, some dealers might also deal with imports or exports of vehicles, which come with their own VAT rules. For example, importing cars from the EU involves different VAT treatment than selling domestically, so it’s worth consulting HMRC guidance or a tax professional if this applies to your business.
What Does Corporation Tax Mean For A Car Dealership?
Corporation tax is a key responsibility if your car dealership is set up as a limited company. Unlike sole traders or partnerships, companies must pay tax on their profits after expenses at the current corporation tax rate, which you can check on HMRC’s Corporation Tax rates.
It’s important to keep clear financial records throughout the year. This includes sales, purchases, salaries, and any other business expenses. Proper bookkeeping helps you accurately calculate your taxable profit and avoid surprises when it’s time to file your company tax return.
Your company will need to submit a Company Tax Return (CT600) to HMRC, usually within 12 months of the end of your accounting period. Late filing or incorrect returns can lead to penalties, so staying organised and on schedule is vital.
Remember that corporation tax is separate from VAT and income tax, so even if you pay VAT, you still have to handle corporation tax correctly.
Getting professional advice or working with an accounting firm experienced in car dealership tax matters can help you maximise these benefits and stay compliant.
What Are Income Tax Responsibilities for Sole Traders and Partners?
If your car dealership operates as a sole trader or a partnership, you won’t pay corporation tax like a limited company does. Instead, you pay income tax on the profits your business makes, and this is done through Self Assessment. HMRC provides full details on how Self Assessment works.
As a sole trader, your business profits are treated as your personal income. After deducting your allowable business expenses, what’s left is your taxable profit, and this is what you pay income tax on, according to the personal income tax bands. You’ll also need to pay Class 2 and Class 4 National Insurance contributions, explained here: National Insurance for self-employed.
If you're in a partnership, each partner pays income tax individually on their share of the business's profits. The partnership itself must submit a partnership tax return, while each partner completes their own Self Assessment.
To stay on the right side of HMRC, it’s important to:
Register for Self Assessment
Keep detailed records of income and expenses throughout the year.
File your tax return by 31 January each year (for the previous tax year ending 5 April).
Pay any tax and National Insurance due by the same 31 January deadline.
If your tax bill is over £1,000, you may also need to make Payments on Account, which are advance payments towards your next year’s tax bill.
Handling income tax properly can save you from costly penalties and help you keep control of your dealership’s finances, especially if your business is growing and profits are fluctuating year to year.
Employer Taxes Car Dealerships Need to Manage
If your car dealership has employees - sales staff, mechanics, or admin, you’re responsible for managing certain employer taxes and duties.
These go beyond simply paying wages. You’ll need to set up and run PAYE (Pay As You Earn), which is how HMRC collects income tax and National Insurance from your staff’s salaries.
Under PAYE, you must:
Deduct income tax and National Insurance contributions from your employees' wages
Pay employer National Insurance (usually 13.8%) on top of their salaries
Send regular Real Time Information (RTI) reports to HMRC every time you pay employees
Provide payslips and annual P60 forms to staff
Ensure you’re correctly reporting benefits in kind (like company cars)
You’ll also need to contribute to a workplace pension for eligible employees under the government’s auto-enrolment rules. This is overseen by The Pensions Regulator.
Other possible taxes or duties include:
Apprenticeship Levy – if your annual payroll is over £3 million.
Statutory payments – like sick pay and maternity pay, which can be reclaimed or partially. offset.
Employment Allowance – which can reduce your employer’s National Insurance bill (check eligibility here).
All these obligations must be handled correctly and on time to avoid fines and maintain staff trust. Using payroll software or working with an accountant familiar with motor trade payroll can help you stay compliant and reduce admin stress.
Conclusion
Whether you’re a sole trader managing your own returns or a limited company handling PAYE for staff, the UK tax system expects car dealers to stay organised, report accurately, and make timely payments.
That’s a lot to juggle, especially when you're also trying to grow your business.
If you ever feel unsure about how these taxes apply to your dealership or just want to be sure you’re not missing anything, it’s worth getting proper support.
At Rhombus Accounting Firm, we specialise in helping UK auto dealerships with bookkeeping and VAT Margin Scheme complexities. Contact us today to find out how we can support your business and help you stay on top of your finances.
Thanks for reading!
Meet Lewis
Lewis is a professional accountant and founder of Rhombus Accounting. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn.
Book a call today to learn more about what Lewis and Rhombus Accounting can do for you.
