Many VAT-registered businesses pay more VAT than required when reselling eligible goods. Where the rules apply, a VAT Margin Scheme can reduce the VAT due by taxing only the margin, rather than the full selling price. This can be particularly valuable for businesses buying stock from private individuals or other sellers where no recoverable VAT was charged on purchase.
In this article, we explain how VAT Margin Schemes work, who can use them, which goods qualify, how the calculation is made, what records HMRC requires, and the key rules businesses need to understand before applying the scheme in practice.
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What Is a VAT Margin Scheme and How Does It Work?
A VAT Margin Scheme is an optional method of accounting for VAT that allows eligible businesses to calculate VAT on the margin rather than the full selling price. In simple terms, VAT is charged on the difference between what an item was bought for and what it was sold for, rather than on the total amount paid by the customer.
Under a VAT Margin Scheme, VAT is charged at 16.67%, or one-sixth of the margin. This is because the margin is treated as a VAT-inclusive amount. At the standard 20% VAT rate, the VAT element is one-sixth of the total. HMRC therefore requires the VAT to be extracted from the margin rather than being added on top.
For example, if a business buys a work of art for £1,500 and later sells it for £2,000, the margin is £500. The VAT due under the scheme is one-sixth of £500, which is £83.33.
It is worth noting that a margin-based VAT treatment is not limited to resale goods. The wider VAT system includes other sector-specific margin schemes, such as the Tour Operators Margin Scheme (TOMS), which applies to businesses that buy and resell travel and holiday packages.
Benefits of Using a VAT Margin Scheme
The key benefits of a VAT Margin Scheme include:
- Lower VAT: The scheme prevents businesses from having to account for VAT on the full resale value of eligible goods where no recoverable VAT was charged on purchase.
- Wider sourcing options: It allows businesses to buy eligible stock from private individuals, unregistered businesses, and other qualifying sellers, rather than relying only on VAT-registered suppliers.
- Protection for profit margins: By reducing the VAT due on eligible sales, the scheme can help protect margins and support more competitive pricing.
- Simplified VAT treatment: For some resale businesses, the scheme can provide a more practical VAT treatment than accounting for VAT on the full selling price, provided the eligibility and record-keeping rules are met.
"When applied correctly, the VAT Margin Scheme can play an important role in helping businesses manage VAT efficiently, protect their margins, and ensure the correct VAT treatment of eligible resale transactions. However, the rules around eligibility, calculations, and record keeping are strict, so it is important for businesses to understand how the scheme works before applying in practice."
Eligibility Criteria for VAT Margin Schemes
Not all businesses can use a VAT Margin Scheme. To apply the scheme correctly, both the goods being sold and the circumstances in which they were purchased must meet HMRC’s eligibility requirements. This is why it is important to understand when the scheme can be used, when it cannot, and where special rules apply.
| Eligible Goods | Non-Eligible Goods |
|---|---|
| Second-hand goods that can still be used, or could be used after repair | Goods bought with VAT charged on the purchase |
| Works of art, subject to HMRC rules | Precious metals |
| Antiques – Over 100 years old | Investment gold |
| Collectors’ Items – Stamps, coins and goods of historical, scientific, or archaeological interest | Precious stones |
If a business buys and sells a mixture of eligible and non-eligible goods, it is important to apply the correct VAT treatment to each transaction rather than assuming the scheme applies across all sales.
When Can a Business Use a VAT Margin Scheme?
A business can use a VAT Margin Scheme when it buys and resells eligible goods within the following categories:
- Second-hand goods: Goods that can still be used, or could be used after repair.
- Works of art: Eligible works of art, subject to HMRC’s rules.
- Antiques: Goods that are over 100 years old.
- Collectors’ items: Items such as stamps, coins, and goods of historical, scientific, or archaeological interest.
When can’t a business use a VAT Margin Scheme?
A business cannot use a VAT Margin Scheme if:
- VAT charged on purchase: VAT has been charged on an item, and that VAT has or could have been reclaimed.
- Goods outside the scheme: The scheme only applies to eligible second-hand goods, works of art, antiques, and collectors’ items. Goods outside those categories must be dealt with under the normal VAT rules.
- Excluded items: Certain goods are specifically excluded from the scheme, including precious metals, investment gold, and precious stones.
- Insufficient records: A business must keep a stock book, invoices, and supporting records needed to prove that the goods qualify and that the margin has been calculated correctly.
Special Cases
Special rules apply to certain types of goods and business models, including:
- Second-hand vehicles
- Horses and ponies
- Houseboats and caravans
- Pawnbrokers
- Auctioneers
- Sales by agents
Second-hand vehicles require particular care, as HMRC sets out separate guidance, and the rules differ from the standard scheme. Auctioneers, agents, and pawnbrokers may also be subject to additional rules, so businesses should check the relevant guidance carefully before applying the scheme.
The Global Accounting Scheme
The Global Accounting Scheme is a simplified version of the VAT Margin Scheme, although it can often be a source of confusion for many businesses. It is designed for businesses that sell high volumes of low-value eligible goods, where calculating the margin on each item individually would be impractical.
The key difference is that VAT is calculated on the overall margin across eligible purchases and sales in a VAT period, rather than on each item. Under the standard margin scheme, the calculation is carried out on an item-by-item basis.
There are still strict conditions to meet. HMRC states that individual items sold under the global accounting scheme must have a purchase price of £500 or less. The scheme is most relevant to businesses such as charity shops and high-volume second-hand dealers.
VAT Margin Scheme Calculation with example
The VAT Margin Scheme works by taxing the margin rather than the full selling price. To calculate the VAT due, a business subtracts the purchase price from the selling price and applies VAT at one-sixth of that margin. If there is no margin, or the item is sold at a loss, no VAT is due under the scheme.
Example:
Assume a business buys a piece of artwork from a private individual for £3,000 and later sells it for £4,200. The calculation would be as follows:
- Purchase price: £3,000
- Selling price: £4,200
- Margin: £1,200
- VAT due: £1,200 x 1/6 = £200
Under the VAT Margin Scheme, the VAT due on the sale is £200.
Although the calculation itself is simple, businesses must still ensure that the goods are eligible, the purchase qualifies for the margin scheme treatment, and the correct records are in place before using it. For that reason, it is often sensible to seek professional advice before applying the scheme in practice.
For support in calculating and recording the sale of goods under a VAT Margin Scheme, speak to DS Burge & Co today.
Record Keeping for VAT Margin Schemes and HMRC Penalties
Businesses do not need to make a separate application to HMRC to use a VAT Margin Scheme. HMRC states that a business can start using the scheme at any time, provided it keeps the correct records and accounts for the scheme properly on its VAT return.
Beyond the standard VAT records, businesses using a VAT Margin Scheme must also keep scheme-specific records as supporting evidence. These include:
- Stock book: Showing each item bought and sold under the scheme.
- Purchase invoices: Invoices and supporting purchase records for eligible goods.
- Sales invoices: Invoices for goods sold under the scheme.
- Supporting evidence: Records showing that the goods qualify for a VAT Margin Scheme treatment and that the margin has been calculated correctly.
HMRC requires VAT records to be held for a minimum of 6 years. If a business still holds stock that was purchased more than 6 years ago and intends to sell it under the scheme, the supporting evidence must be retained until the item is sold. HMRC also requires that any goods bought or sold using a VAT Margin Scheme are included on the VAT return. For the full filing criteria, businesses should review HMRC’s guidance on VAT Margin Schemes and record keeping.
HMRC Penalties
Poor record-keeping or incorrect VAT treatment can lead to wider compliance issues. For VAT periods starting on or after 1 January 2023, HMRC applies a points-based penalty regime for late VAT return submissions. Once the relevant threshold is reached, a £200 penalty applies, with a further £200 penalty for each additional late return while the business remains at that threshold.
HMRC also charges late payment interest on overdue VAT, and further penalties may apply where payment remains outstanding beyond the relevant deadlines. Where a VAT return contains an error, HMRC says no penalty is due if the business took reasonable care. However, careless or deliberate inaccuracies can result in penalties, which is why accurate records and expert advice are so important.
For businesses using a VAT Margin Scheme, even a small technical error can affect the VAT calculation, invoice treatment, records retained, and the VAT return itself. For expert advice on whether a VAT Margin Scheme is right for your business, or for support with filing VAT returns correctly, speak to DS Burge & Co before submitting your next return.
Conclusion
The VAT Margin Scheme can be an effective tool for UK businesses that buy and resell eligible second-hand goods, works of art, antiques, and collectors’ items. Where the rules apply, calculating VAT based on the margin rather than the full selling price can reduce the VAT due and improve the overall commercial position of the business.
However, a VAT Margin Scheme does not apply automatically. The onus is on businesses to ensure that goods meet eligibility requirements and that the required records are in place before applying the scheme. Getting this wrong can lead to errors on VAT returns, compliance risks and unnecessary costs.
For expert advice on whether a VAT Margin Scheme is right for your business, or for support with VAT returns, speak to DS Burge & Co. Our specialist VAT advisers can help you apply the correct treatment and meet HMRC’s requirements with confidence.
FAQs
Using Standard VAT accounting, VAT is charged on the full selling price. Under a VAT Margin Scheme, VAT is only charged on the margin, being the difference between the purchase price and the selling price.
For example, if an item is bought for £10 and sold for £20, the margin is £10, and the VAT due under the scheme is £1.67. If standard VAT rules are applied, VAT would be accounted for on the full selling price. If the £20 selling price is VAT inclusive, the VAT element would be £3.33.
No. You must be VAT-registered to use a VAT Margin Scheme, as sales made under the scheme are reported through your VAT return. For further guidance, see DS Burge & Co VAT Returns Service page.
No. A VAT Margin Scheme is used where the item was bought without recoverable VAT, for example, from a private individual. If VAT was charged on the purchase and that VAT was reclaimed, or could have been reclaimed, the item must be sold under standard VAT rules rather than under a margin scheme.
VAT on overheads, repairs, parts, and accessories may still be reclaimed separately under the standard VAT rules.
No. VAT must not be shown separately on an invoice for goods sold under a VAT Margin Scheme. The invoice should show the total selling price and include the relevant HMRC wording, such as “Margin Scheme works of art”.
It is possible to use the VAT Margin Scheme internationally in some cases. However, specific rules apply to goods imported from or exported to countries outside the UK, including transactions involving Northern Ireland and the EU. Businesses should review the VAT treatment carefully and seek professional guidance from experts such as DS Burge & Co before applying the scheme to international sales.