DVLA can make mistakes, and I imagine, so can the database your potential buyers insurace company used.
But DVLA is the legal stater of status in the UK, not some insurance companies database (I've not heard of the one you mention).
And if DLVA are happy the car is legal, and you have insurance of your own and MOT, it must therefore be legal. True, DVLA could 'correct' their view, but they've not done so yet.
I assume your insurance company has used a database too, and I rather doubt DVLA would have issued a VIC20 and the ensuing V5c if their records showed 'this car must be scrapped'.
As 'ifithelps' says though, £350 'depreciation' in two years is a bargain.
DVLA helpline or local office, but neither will get to the bottom of this in 5 minutes.
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