VAT Margin Scheme Explained: A Valuable VAT Saving Opportunity for Businesses
For businesses that buy and sell second-hand goods, antiques, works of art, or collectors' items, the VAT Margin Scheme can be an effective way to reduce VAT liabilities and improve profitability.
Rather than paying VAT on the full selling price, eligible businesses only pay VAT on the profit made when an item is sold. This can provide significant savings, particularly for businesses that regularly purchase goods from private individuals or non-VAT registered sellers.
What is the VAT Margin Scheme?
Under the VAT Margin Scheme, VAT is calculated on the difference between what you paid for an item and what you sold it for, rather than on the total selling price.
VAT is charged at one-sixth (16.67%) of the profit margin.
The scheme can be used when selling:
Second-hand goods
Works of art
Antiques
Collectors' items
However, it cannot be used for:
Goods purchased with VAT that has been charged and reclaimed
Precious metals
Investment gold
Precious stones
Do You Need to Register?
No separate registration is required to use the VAT Margin Scheme.
Provided your business meets the eligibility requirements and maintains the correct records, you can apply the scheme whenever appropriate. However, if the required conditions are not met, HMRC may require VAT to be paid on the full selling price instead.
Record Keeping Requirements
Accurate record keeping is essential when using the VAT Margin Scheme.
In addition to your normal VAT records, you must maintain:
A stock book that tracks each item sold under the scheme individually
Purchase invoices for qualifying items
Sales invoices for qualifying items
VAT records should generally be retained for six years. If an item is held in stock for longer than six years, records relating to that item must be kept until it is sold.
Invoice Requirements
The VAT Margin Scheme has specific invoicing rules which differ from standard VAT invoices.
Purchase Invoices
When purchasing goods for resale under the scheme, the invoice should include:
Date
Seller's name and address
Buyer's name and address
Invoice number
Item description
Total purchase price
Unique stock book number (where applicable)
Sales Invoices
When selling goods under the scheme, the invoice should include:
Date
Your name, address and VAT registration number
Buyer's name and address
Invoice number
Item description
Unique stock book number
Total selling price
Importantly, VAT must not be shown separately on sales invoices issued under the scheme.
Reporting on Your VAT Return
Margin scheme transactions must still be included on your VAT return.
Box 1 – Include the VAT due on the margin.
Box 6 – Include the total selling price of qualifying goods sold, less any VAT due on the margin.
Box 7 – Include the total purchase price of qualifying goods purchased.
Transactions under the scheme do not need to be included in Boxes 8 and 9.
Example: VAT Margin Scheme in Practice
A VAT-registered business purchases an antique painting from a member of the public for £1,000 and later sells it for £1,400.
As no VAT was charged when the painting was purchased, the business can use the VAT Margin Scheme. VAT is calculated on the £400 profit margin, resulting in a VAT liability of £66.68 rather than VAT being charged on the full selling price.
Exceptions to Be Aware Of
Different rules apply to certain types of goods and businesses, including:
Second-hand vehicles
Horses and ponies
Houseboats and caravans
Pawned goods
Auctioneers and agents
Businesses trading between Northern Ireland and the EU
Businesses dealing with high volumes of low-value items may also be eligible to use the Global Accounting Scheme, a simplified variation of the VAT Margin Scheme.
Final Thoughts
The VAT Margin Scheme can provide valuable VAT savings for businesses dealing in second-hand goods, antiques, artwork and collectors' items. However, the benefits rely on maintaining the correct records and following HMRC's invoicing requirements.
If you're unsure whether the scheme is suitable for your business or need support with VAT compliance, professional advice can help ensure you're applying the rules correctly and making the most of the reliefs available.