VAT margin schemes offer significant tax advantages for businesses dealing in second-hand goods, antiques, and collectibles. Instead of charging VAT on the full selling price, these schemes allow you to pay VAT only on your profit margin - the difference between what you paid and what you sold an item for.
What are VAT Margin Schemes?
VAT margin schemes tax the difference between your purchase price and selling price, rather than the full selling price. You pay VAT at 16.67% (one-sixth) on the margin, which can significantly reduce your VAT liability compared to the standard 20% rate applied to the entire sale price.
How the Calculation Works
Example calculation:
- Purchase price: £1,000
- Selling price: £1,500
- Margin: £500 (£1,500 - £1,000)
- VAT due: £83.33 (£500 × 16.67%)
Compare this to standard VAT accounting where you’d charge 20% on the full £1,500 sale price, resulting in £300 VAT.
Eligible Goods
Second-Hand Goods
- Motor vehicles (cars, motorcycles, commercial vehicles)
- Electronics and computers
- Furniture and household items
- Books, clothing, and sporting goods
- Musical instruments and tools
- Machinery and equipment
Works of Art
- Paintings, drawings, and sculptures
- Photographs and prints
- Ceramics and glassware created by artists
Antiques
- Items that are at least 100 years old
- Furniture, ceramics, textiles, and decorative objects
- Vintage jewelry and timepieces
Collectors’ Items
- Stamps, coins, and currency
- Items of scientific, historical, or archaeological interest
- Rare books and manuscripts
Eligibility Requirements
Business Requirements
- Must be VAT registered
- No separate registration needed for margin schemes
- Can be used alongside other VAT schemes
Purchase Conditions
You can only use margin schemes when you bought the goods from:
- Private individuals (not VAT registered)
- Other businesses using margin schemes
- VAT registered businesses where no VAT was reclaimable
Goods Must Be
- Genuinely second-hand (not new items you’ve used)
- Bought and sold in second-hand condition
- Acquired in circumstances where you couldn’t reclaim VAT
Items Excluded from Margin Schemes
- Precious metals and gemstones
- Newly manufactured items
- Items where you reclaimed VAT on purchase
- Goods bought with standard VAT invoices
- Imports from outside the UK (with some exceptions)
Special Rules for Motor Vehicles
Second-hand cars have specific requirements:
- Must have been used on the road
- Must be suitable for further use
- Cannot be imports from outside the EU
- Strict invoicing requirements apply
- Purchase must be from non-VAT registered entity
Record-Keeping Requirements
Essential Records
- Margin scheme stock book listing all eligible purchases and sales
- Purchase invoices showing cost price
- Sales invoices (cannot show VAT separately)
- Records of individual item margins
Purchase Records
- Supplier details and purchase dates
- Description and cost of each item
- Evidence that VAT couldn’t be reclaimed
Sales Records
- Customer details and sale dates
- Selling price for each item
- Calculated margin and VAT due
Invoicing Rules
Margin Scheme Invoices Must
- Not show VAT as a separate amount
- Include total price inclusive of VAT
- State “VAT margin scheme” or similar indication
- Show your VAT registration number
Cannot Include
- Separate VAT line items
- Standard VAT calculations
- Reference to 20% VAT rate
VAT Return Reporting
- Report margin scheme sales in Box 1 (VAT due on sales)
- Include VAT due on margins in Box 3 (VAT due)
- Exclude margin scheme purchases from Box 4 (VAT reclaimed)
- Cannot reclaim VAT on margin scheme purchases
Key Advantages
Reduced VAT Liability
Pay 16.67% on profit margin instead of 20% on full sale price, often resulting in substantial savings.
Competitive Pricing
Lower VAT burden allows more competitive pricing while maintaining profitability.
Loss Protection
If you sell an item for less than you paid, no VAT is due on that transaction.
Cash Flow Benefits
Reduced VAT payments improve cash flow, especially for high-volume, low-margin businesses.
Potential Drawbacks
No Input VAT Recovery
Cannot reclaim VAT on purchases eligible for margin schemes, limiting tax recovery options.
Strict Record-Keeping
Requires detailed individual item tracking and comprehensive documentation.
Limited Application
Only applies to specific types of goods and purchase circumstances.
Invoicing Restrictions
Cannot show VAT separately, which some business customers prefer.
Global Accounting Method
For high-volume, low-value items, you can use the Global Accounting Scheme - a simplified version where:
- Calculate VAT on total margin across all eligible sales
- Reduces administrative burden for books, clothing, and similar items
- Still requires basic purchase and sales records
Getting Started
No Registration Required
Simply start using margin schemes by:
- Ensuring goods and purchases are eligible
- Implementing proper record-keeping
- Calculating margins correctly
- Reporting on VAT returns appropriately
Mixed Trading
You can use margin schemes for eligible items while accounting for VAT normally on other goods. Each transaction is assessed individually.
Common Mistakes to Avoid
- Applying 20% to the margin instead of 16.67%
- Including refurbishment costs in margin calculations
- Using the scheme for items where VAT was reclaimable
- Showing VAT separately on margin scheme invoices
- Poor record-keeping leading to compliance issues
Professional Advice
Given the complexity of margin scheme rules and the potential for significant tax savings, consider consulting with a VAT specialist to:
- Assess eligibility for your specific business
- Implement proper record-keeping systems
- Ensure compliance with all requirements
- Optimize your overall VAT strategy
Conclusion
VAT margin schemes provide valuable tax relief for businesses dealing in second-hand goods, antiques, and collectibles. While they require careful administration and record-keeping, the potential VAT savings of paying 16.67% on margins rather than 20% on full sale prices makes them an attractive option for eligible businesses.
The key to success lies in understanding the eligibility requirements, maintaining meticulous records, and ensuring all transactions meet the scheme’s strict conditions.