VAT Margin Schemes: Which One to Use

If you buy and sell second-hand goods, works of art, antiques, or collectors' items, VAT margin schemes let you pay VAT only on your profit (the margin) rather than on the full selling price. This can significantly reduce your VAT bill compared to standard VAT treatment. There are several different margin schemes available depending on what type of goods you're selling.

What are VAT margin schemes?

VAT margin schemes work by taxing the difference between what you paid for an item and what you sold it for. You pay VAT at 16.67% (one-sixth) on this margin, rather than the standard 20% on the full selling price.

For example, if you buy a work of art for £1,500 and sell it for £2,000, your margin is £500. You'll pay VAT at 16.67% on this £500 difference, which equals £83.33.

What goods are eligible?

You can use a margin scheme when you sell:

• Second-hand goods (items that can still be used, or could be used after repair)
• Works of art (most items normally described as works of art, with some exceptions like technical drawings or scenery for theatres)
• Antiques (goods over 100 years old)
• Collectors' items (stamps, coins, currency and other pieces of scientific, historical or archaeological interest)

You cannot use a margin scheme for:

• Any item where you were charged VAT when you bought it
• Precious metals
• Investment gold
• Precious stones

When you can buy goods under the scheme

To use a margin scheme when selling an item, you must have bought it from:

• Private individuals
• Businesses not registered for VAT
• Dealers or businesses who were unable to reclaim the input VAT on purchase
• VAT-registered dealers who sold it to you under a margin scheme

In Northern Ireland, you can also buy from VAT-registered dealers in EU member states if they supplied the goods to you under a margin scheme.

The key rule: if you were charged VAT separately on your purchase, you cannot use a margin scheme when you sell that item.

Special schemes for different goods

Different types of goods have specific rules:

Second-hand vehicles have their own detailed rules, including provisions for buying from auctions, online auction sites, insurance companies, finance houses, and Motability (where VAT is charged at zero rate).

Horses and ponies, houseboats and caravans, and items that have been pawned each have separate rules.

High volume, low price items can use the Global Accounting Scheme, which is a simplified version of the margin scheme.

There are also different rules if you're an auctioneer or an agent.

How to start using a margin scheme

You don't need to register or apply to use a VAT margin scheme. You can start using one at any time by:

1. Keeping the correct records (detailed below)

2. Reporting margin scheme sales on your VAT return

If you don't meet all the scheme's requirements, you'll have to pay VAT on the full selling price of each item under standard VAT rules.

Record keeping requirements

You must keep your usual VAT records, plus:

A stockbook that tracks each item sold under the margin scheme individually, recording:

• Stock number (in numerical sequence)
• Date of purchase and date of sale
• Purchase invoice number and sales invoice number
• Purchase price and selling price
• Name of seller and name of buyer
• Description of the item
• Margin on sale (selling price less purchase price)
• VAT due (16.67% or one-sixth)

Copies of purchase and sales invoices for all items.

You must keep these records for 6 years. For stock you bought more than 6 years ago that you still plan to sell under the margin scheme, you must keep records until you sell the item.

Invoice requirements

Margin scheme invoices have different requirements from standard VAT invoices.

When you buy, your purchase invoice must include:

• Date
• Seller's name and address
• Your name and address
• The item's unique stockbook number (if bought from another VAT-registered business)
• Invoice number (unless you made it out yourself)
• Item description
• Total price (with no other costs added)
• If from another VAT-registered business: the text 'margin scheme - second hand goods', 'margin scheme - works of art' or 'margin scheme - collectors' items and antiques'

When you sell, your sales invoice must include:

• Date
• Your name, address and VAT registration number
• Buyer's name and address
• The item's unique stockbook number
• Invoice number
• Item description
• Total price (VAT must not be shown separately)
• The text 'margin scheme - second hand goods', 'margin scheme - works of art' or 'margin scheme - collectors' items and antiques'

Completing your VAT return

Report margin scheme transactions on your VAT return as follows:

Box 1: Include the output tax due on all eligible goods sold in the period

Box 6: Include the full selling price of all eligible goods sold, less the VAT due on the margin

Box 7: Include the full purchase price of eligible goods bought in the period

You don't include margin scheme purchases or sales in boxes 8 and 9.

What you cannot include in margin calculations

When calculating your margin, you cannot include:

• Business overheads
• Repairs
• Parts or accessories

Instead, reclaim VAT on these costs through your VAT return in the normal way.

Buying vehicles at auction

When buying second-hand vehicles at auction to sell under a margin scheme, your purchase price is the hammer price plus charges for services (such as buyer's premium). These charges must not show VAT separately.

If the auctioneer charges VAT separately on the hammer price, you cannot use the margin scheme or global accounting for your onward sale.

You must not include indemnity fees (usually charged when buying at auction) in your purchase price calculations for the margin scheme.

Sources

• VAT margin schemes
• Buying second-hand vehicles using a VAT margin scheme

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.