What is the VAT margin scheme?
The VAT margin scheme taxes the difference between what you sell an item for and what you bought it for (The margin), rather than the full selling price.
The margin scheme can be used when you sell:
- second-hand goods
- works of art
- collectors’ items
The margin scheme can’t be used for:
- any item you bought for which you were charged VAT. (This generally means that the goods need to have been bought from a private individual, or from another dealer under the scheme)
- precious metals
- investment gold
- precious stones
This article discusses the standard scheme. Please note that there are different rules for:
- Second hand vehicles
- Horses and ponies
- Houseboats and caravans
- Items that have been pawned
- High volume, low price items, where the Global Accounting Scheme can be used instead
- If you buy and sell goods in Northern Ireland and the EU
What rate of VAT is charged on the margin scheme?
VAT is charged at one-sixth of the difference between the price you sell the item for and what you bought it for.
VAT margin scheme example
If you buy an item for £500 and sell it for £2,000, you have made a margin of £1,500. Using the margin scheme, you pay VAT at one-sixth of the £1,500 margin. VAT to pay is therefore £250 (£1,500 x 1/6).
Do I need to register for the margin scheme?
You don’t need to register for the VAT margin scheme, and you can start using it at any time.
You need to keep the correct records, and report it on your VAT return.
If you don’t meet all the schemes requirements you have to pay VAT on the full selling price, not just on the margin.
What can I claim VAT on?
The margin scheme taxes the difference between what you buy the item for and what you sell it for.
Any other allowable expenses can be claimed in the normal way through the VAT return, such as:
- Parts and accessories
It’s very important to account for VAT correctly on repairs, work done to the item once purchased, and parts and accessories. These can’t be included as a cost when calculating the margin. For example:
Assume you buy an item for £500, spend £120 (Including £20 of VAT) on parts for it, and £240 (Including £40 of VAT) on repairs. You then sell it for £1,000. VAT would be accounted for as follows:
- When you buy the item for £500, there would be no VAT impact.
- When you spend £120 on parts, you would reclaim £20 VAT on the VAT return in the normal way.
- When you spend £240 on repairs, you would claim £40 VAT on the VAT return in the normal way.
- When you sell the item for £1,000 you pay VAT on the margin. First, calculate the margin. This would be what you sold it for of £1,000, less what you bought if for of £500, so the margin is £500. Next, calculate VAT on the margin. This is one-sixth of £500, so £83.33.
In addition to keeping the usual records, when using the margin scheme you also need to keep:
- a stock book that tracks each item sold under the margin scheme individually
- copies of purchase and sales invoices for all items
The stock book needs to include the following information:
|Stock number in numerical sequence||–|
|Date of purchase||Date of sale|
|Purchase invoice number (unless you made out the purchase invoice yourself)||Sales invoice number|
|Purchase price||Selling price, or method of disposal|
|Name of seller||Name of buyer|
|Description of the item||–|
|–||Margin on sale (sales price less purchase price)|
|–||VAT due (16.67% or one-sixth)|
Records need to be kept for 6 years
What does a purchase invoice have to show?
Where the item is to be sold under the margin scheme, the purchase invoice needs to show:
- seller’s name and address
- your name and address, or that of your business
- the item’s unique stockbook number (if you bought the item from another VAT-registered business)
- invoice number (unless you made out the purchase invoice yourself)
- item description
- total price – you must not add any other costs to this price
- if you bought the item from another VAT-registered business, any of the following: ‘margin scheme – second hand goods’, ‘margin scheme – works of art’ or ‘margin scheme – collectors’ items and antiques’
What does a sales invoice have to show?
Where the item is sold under the margin scheme, the sales invoice needs to show:
- your name, address and VAT registration number
- the buyer’s name and address, or that of their business
- the item’s unique stock book number
- invoice number
- item description
- total price – you must not show VAT separately
- any of the following: ‘margin scheme – second hand goods’, ‘margin scheme – works of art’ or ‘margin scheme – collectors’ items and antiques’
How do you show margin goods in the VAT return?
|Box on the VAT return||What to include|
|Box 1||The output tax due on all eligible goods sold in the period covered by the return|
|Box 6||the full selling price of all eligible goods sold in the period, less any VAT due on the margin|
|Box 7||the full purchase price of eligible goods bought in the period|
You don’t have to include margin scheme purchases or sales in boxes 8 and 9 of your VAT return.
Do I have to use the margin scheme?
You don’t have to use the margin scheme. It’s an option. You can account for VAT in the normal way (claim VAT on purchases and charge VAT on sales).
What is the benefit of the margin scheme?
The benefit of the scheme can be shown in the following example.
Assume a business buys a second hand item from an individual for £500, then sells it for £1,000.
If the standard VAT method was used, the business couldn’t reclaim any VAT on the purchase (because no VAT could have been charged), but would have to charge 20% VAT on the sale. VAT on the sale would be 1/6 x £1,000 = £166.66.
If the business used the margin scheme, VAT would be charged on the margin of £500 (£1,000 proceeds less £500 cost). VAT on the sale would now be 1/6 x £500 = £83.33.
This means that the business gets to keep more money from the sale, or can charge the customer a lower price, and be more competitive.
Where can I find more information?
HMRC have some useful information here.
This article explains our understanding at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. Please seek advice specific to your circumstances.