VAT margin scheme: how it works for second-hand goods

The VAT margin scheme can be useful if your business buys and sells second-hand goods such as antiques, collectors’ items, works of art or second-hand vehicles.

Instead of paying VAT on the full selling price, you pay VAT on the difference between what you paid for the item and what you sold it for. This difference is known as the margin. Guidance on GOV.UK says VAT is charged at 16.67%, or one-sixth, of that margin.

For many resellers, the margin scheme can make a major difference to pricing, cash flow and the VAT they pay. However, the rules are strict. If you use the scheme incorrectly, HMRC may require you to pay VAT on the full selling price instead.

Let’s take a closer look at what you need to know about the scheme.

What is the VAT margin scheme?

The VAT margin scheme is a special VAT scheme for certain second-hand goods and similar items.

Under the normal VAT rules, a VAT-registered business usually accounts for VAT on the full selling price of taxable goods. Under the VAT margin scheme, VAT is calculated only on the margin.

For example, suppose you buy an eligible item for £1,000 and sell it for £1,300.

Your margin is £300.

The VAT due is one-sixth of £300, which is £50.

That means the VAT is not added on top of the selling price. Instead, it is treated as part of the margin.

Who can use the VAT margin scheme?

You may be able to use the VAT margin scheme if you sell eligible:

• second-hand goods
• works of art
• antiques
• collectors’ items

GOV.UK guidance says second-hand goods are goods that can still be used, or could be used after repair. Antiques are goods that are more than 100 years old. Collectors’ items can include stamps, coins, currency and certain items of scientific, historical or archaeological interest. However, not every item that people collect counts as a collectors’ item for VAT margin scheme purposes.

There are also separate rules for some types of goods and transaction, including second-hand vehicles, horses and ponies, houseboats and caravans, and high-volume, low-price items. Auctioneers and agents operating under the scheme are also subject to their own rules.

What goods are not eligible?

The VAT margin scheme does not apply to everything.

You cannot normally use it for an item if you were charged VAT when you bought it. GOV.UK also says the scheme cannot be used for precious metals, investment gold or precious stones.

This means you need to check each purchase carefully. Some stock may qualify for the VAT margin scheme, while other stock must be dealt with under the normal VAT rules.

You also cannot include business overheads, repairs, parts or accessories in your margin scheme calculation. Instead, VAT on these costs is reclaimed through your VAT return in the normal way, where the normal rules allow it.

How do you calculate VAT under the VAT margin scheme?

The basic calculation is simple:

1. Begin with the selling price
2. Deduct the purchase price
3. Calculate VAT as one-sixth of the margin.

Here is a simple example.

The key point is that the VAT is calculated on the VAT-inclusive margin. It is not 20% added to the margin.

This matters for pricing. If you sell eligible second-hand goods, you need to know whether your advertised price leaves enough margin after VAT, fees, repairs and other costs.

VAT margin scheme for cars and second-hand vehicles

Under the second-hand vehicle margin scheme, VAT is calculated on the difference between the price paid for the vehicle and the price it is sold for. It is not calculated on the full selling price of the vehicle.

However, vehicle dealers need to be particularly careful. GOV.UK says the vehicle margin scheme cannot be used for certain types of vehicle. These include new vehicles, vehicles imported into the UK, vehicles bought on an invoice showing VAT separately, category A and B write-offs, and vehicles already sold under the normal VAT rules.

You may be able to use the scheme for second-hand vehicles bought from private individuals, businesses that are not VAT registered, businesses or dealers who could not reclaim input VAT, VAT-registered dealers, and Motability where there is an invoice showing VAT charged at the zero rate. However, the vehicle and invoice still need to meet the scheme rules. For example, if VAT is shown separately on the purchase invoice, the vehicle cannot usually be sold under the margin scheme.

The vehicle calculation also has its own traps. GOV.UK says VAT is due on the difference between what you paid for the vehicle and what you sold it for, not your overall profit. The purchase price does not include the cost of bringing the vehicle to sale, repairs, refurbishment, accessories or business overheads.

For example, if you buy a qualifying car for £7,000 and sell it for £8,200, your gross margin is £1,200. The VAT due is one-sixth of £1,200, which is £200.

You cannot reduce that margin by adding in repair costs, valeting costs, advertising costs or general overheads. Those costs may still matter commercially, but they do not reduce the margin scheme VAT calculation.

What records do you need to keep?

Good records are central to compliance with the VAT margin scheme.

GOV.UK says businesses using a margin scheme must keep normal VAT records. They must also keep a stockbook that tracks each item sold under the scheme individually, plus copies of purchase and sales invoices.

For the general VAT margin scheme, records must usually be kept for six years. If you bought stock more than six years ago and still plan to sell it under the margin scheme, you must keep the records until the item is sold.

Your stock records should make it clear which items were bought and sold under the scheme. They should also support the margin calculation.

In practice, this means your records should identify:

• the item sold
• your purchase price;
• the selling price
• the buyer and seller details
• invoice numbers
• the margin
• the VAT due

A weak stockbook can cause problems if HMRC asks to see how your VAT return was prepared.

What should VAT margin scheme invoices show?

Margin scheme invoices are not the same as ordinary VAT invoices.

When you buy an item that you plan to sell under the VAT margin scheme, you need a purchase invoice that meets the scheme requirements. When you sell an item under the scheme, you must also give your buyer a suitable sales invoice.

A sales invoice must show the total price. It must not show VAT separately. It also needs the correct wording, such as:

• margin scheme – second-hand goods
• margin scheme – works of art
• margin scheme – collectors’ items and antiques

GOV.UK sets out the required invoice information for buying and selling under the margin scheme, including the item description, invoice number, stockbook number and total price.

This is one of the easiest areas to get wrong. If your invoice shows VAT separately when it should not, you may create problems for both your business and your customer.

How does the VAT margin scheme affect your VAT return?

There is no need to register separately for a VAT margin scheme. You can start using one at any time, provided you keep the correct records and report the figures on your VAT return.

Margin scheme goods must still be included on your VAT return. Output tax goes in Box 1. Box 6 should show the full selling price of eligible goods, less the VAT due on the margin. Box 7 should show the full purchase price of eligible goods bought during the period. Margin scheme purchases and sales do not need to be included in boxes 8 and 9.

If your business uses the VAT margin scheme alongside normal VAT rules, you need to take care when using your cloud accounting software. The wrong VAT code can distort your return – so it is worth checking that your software is set up correctly before you file. If you want a broader guide to the process, see our article on how to file a VAT return.

THP’s VAT returns service covers VAT scheme advice, planning, return preparation and dealing with HMRC VAT visits and inspections, including support for businesses using the VAT margin scheme.

Common VAT margin scheme mistakes

The VAT margin scheme is useful, but small errors can become expensive.

Common mistakes include:

• treating all second-hand goods as eligible without checking the rules
• using the scheme where VAT was charged separately on the purchase
• calculating VAT as 20% of the margin instead of one-sixth
• adding repair costs, accessories or overheads to the purchase price
• showing VAT separately on a margin scheme sales invoice
• keeping incomplete stock records
• applying the general margin scheme rules to vehicles without checking the separate vehicle scheme requirements
• missing important details on auction paperwork

The safest approach is to check eligibility before the item is sold. It is much harder to fix VAT errors after invoices have been issued and VAT returns have been submitted.

How THP can help

If you buy and sell second-hand goods, vehicles, antiques or collectors’ items, the VAT margin scheme may reduce the VAT you pay.

However, the scheme only works properly if the goods qualify, the margin is calculated correctly, and your invoices and records meet HMRC requirements.

THP can help you:

• Check whether the VAT margin scheme applies to your business
• Set up proper stockbook and invoicing procedures
• Review VAT codes in your accounting software
• Prepare and submit accurate VAT returns
• Compare the margin scheme with other VAT schemes
• Deal with HMRC questions or historic VAT errors
• Compare the margin scheme with other VAT schemes, such as the VAT cash accounting scheme and the VAT Flat Rate Scheme

If you are unsure whether your business can use the VAT margin scheme, speak to THP before relying on it. A short review now could prevent a much larger VAT problem later.

Learn more about out VAT returns service.