What Are VAT Margin Schemes and Am I Eligible?

In short: A VAT margin scheme lets VAT-registered businesses pay VAT only on their margin, the difference between the buying and selling price. It applies to second-hand goods, works of art, antiques, and collectors’ items. The VAT due is one-sixth (16.67%) of the margin. You don’t register separately, but you must keep records for six years.

Do you find VAT margin schemes confusing? You’re not alone. HMRC has a number of VAT schemes. The margin scheme can be a game-changer for businesses that deal in second-hand goods, antiques, and collectors’ items, but it can be hard to grasp. In this guide, we take a closer look at VAT margin schemes and the benefits they offer.

What is a VAT margin scheme?

A VAT margin scheme is a way to pay VAT only on your profit margin, not on the full selling price. It can greatly cut the VAT you pay on certain second-hand goods, works of art, antiques, and collectors’ items.

VAT margin schemes tax the difference between the purchase price and the selling price of eligible goods. This lets businesses pay VAT more efficiently and stay competitive. Using a VAT margin scheme can also help businesses run their finances better. Read more in our guide: What Is the EU's Tour Operator Margin Scheme?.

But how exactly do these schemes work? And what are the benefits of using them? Let’s look at two key parts: how a VAT margin scheme works and the benefits it brings to businesses.

How do VAT margin schemes work?

VAT margin schemes work by taxing only the margin, which is the difference between the price you paid and the price you sell for. They are designed to make VAT easier to work out for businesses dealing in eligible goods.

You multiply the margin by the VAT fraction (1/6 or 16.67%) to find the VAT you owe. You can use the global accounting method for clothing, furniture, books, and many other types of goods that count as second-hand, antique, and so on.

There are some exceptions and special cases within VAT margin schemes. For example, second-hand cars have their own rules. You work out the margin and pay 16.67% VAT on it, under strict regulations.

For collectors’ items, you assume that the profit from the sale includes VAT. You then divide the profit by 6 to find the VAT, provided you meet all conditions and show this on your return.

You need proper records, such as invoices and receipts, to fill out your VAT return. You must leave out any extra costs linked to the second-hand sale, such as repairs or refurbishments, when you work out the VAT margin.

What are the benefits of using a VAT margin scheme?

The main benefit of a VAT margin scheme is a better profit margin, because you pay VAT on the margin rather than the full price. It lowers the total cost of goods sold, since you pay less VAT on sales of second-hand goods.

VAT margin schemes also make VAT simpler. You work out VAT on the margin rather than on the full selling price, which streamlines the whole VAT process. Using the VAT margin can help your business run more efficiently.

As a result, you can stay competitive by lowering the cost of goods and making your VAT sums simpler. This makes VAT margin schemes an attractive option for businesses that want to run better and stay ahead of the competition.

Who is eligible for VAT margin schemes?

VAT-registered businesses selling eligible goods are eligible for VAT margin schemes. Not every business or item qualifies. Both the business and the goods it sells must meet specific criteria.

In this section, we look at what businesses and goods need to qualify for VAT margin schemes. This will help you work out whether your business and products qualify.

Which businesses are eligible for VAT margin schemes?

To be eligible for the VAT margin scheme, a business must register for VAT. Once it has done this, it can use the scheme.

You don’t need to register separately for the VAT margin scheme. But you should keep accurate records, including a stock book and purchase and sales invoices. You need these records to report goods sold through the margin scheme on your VAT return.

Which goods are eligible for VAT margin schemes?

Only second-hand goods, works of art, antiques, and collectors’ items are eligible for a VAT margin scheme. You must also buy the goods in a way that meets the rules for that VAT margin scheme. For example, you might buy them from a private individual, or from another VAT registered business using a margin scheme.

Remember that not all second-hand goods are eligible. Some goods, such as livestock and alcoholic drinks, are excluded from VAT margin schemes.

How do you join and use a VAT margin scheme?

You join a VAT margin scheme simply by keeping the right records and reporting margin sales on your VAT return. Now that you know the eligibility criteria, this section walks you through how to join and use a VAT margin scheme. It gives you all you need to start benefiting right away.

What are the steps to join a VAT margin scheme?

Joining a VAT margin scheme is simple. There’s no need to register separately for the scheme. You can start using a VAT margin scheme at any time. Just keep accurate records of the purchase and sale price of eligible goods, and report them on your VAT return.

Be sure to ask your accountant for advice before you join a VAT margin scheme. That way, you can be sure you’re making the best decision for your business.

What records do you need for a VAT margin scheme?

For a VAT margin scheme, you need a stock book that tracks each item sold under the scheme. Accurate record-keeping is crucial if you use a VAT margin scheme.

You must also keep the usual VAT records of all purchases and sales. This includes copies of all invoices you issue and all invoices you receive. You must keep these records for at least six years.

Good records help you meet the scheme’s rules. They also help you track your margins and make informed decisions about your sales strategy.

How do VAT margin schemes apply to cross-border sales?

VAT margin schemes also matter for cross-border sales, both within the EU and outside it. In this section, we explore how these schemes apply to cross-border sales. We also cover the special points to consider when you deal with international customers.

When you sell to customers in other countries, you must be aware of the different VAT rules.

VAT margin scheme for EU sales

For cross-border sales within the European Union, you can use the VAT margin scheme on goods sold to customers in other EU countries. You then pay VAT only on your margin. For example, HMRC treats margin scheme sales from Northern Ireland to an EU member state exactly like margin scheme sales within Northern Ireland. VAT is due on the margin in the UK.

You must also report the sales and purchases made under the margin scheme to the relevant tax authorities. Keep in mind that you can’t use the margin scheme for the transfer of second-hand goods between EU member states.

VAT margin scheme for non-EU sales

If you export goods to a destination outside the UK, you may be able to zero-rate the sale outside the margin scheme. You must meet the conditions and time limits for zero-rating. Works of art, antiques, and collectors’ items also qualify for a reduced rate of import VAT when imported into Great Britain from outside the UK.

However, specific rules apply to certain goods, such as motor vehicles, under the VAT margin scheme for non-EU sales. You must follow these rules to be eligible for the scheme.

What are the exceptions and special cases?

Some goods are excluded from VAT margin schemes, and some situations have their own rules. VAT margin schemes offer many benefits, but you need to know about these exceptions and special cases. We cover them in this section.

For example, goods that are subject to excise duty, such as alcohol and tobacco, are subject to full VAT.

Which goods are excluded from VAT margin schemes?

Any goods that are not second-hand goods, works of art, antiques, or collectors’ items are excluded from VAT margin schemes. Precious metals, investment gold, and precious stones are also excluded. Under the Global Accounting Scheme, you also can’t include any item that cost more than £500.

Livestock and certain second-hand goods, such as alcohol and tobacco products, are not eligible for VAT margin schemes.

What special circumstances apply in VAT margin schemes?

Some situations within VAT margin schemes have their own rules and exceptions. For example, the margin scheme is optional for second-hand goods. This means you can choose whether or not to use the scheme for these items.

Also, you may sell a high volume of qualifying items at a low cost. If so, you may be able to use a simpler VAT margin scheme called the Global Accounting Scheme.

Knowing about these special circumstances helps you make informed decisions and follow the rules.

How do you calculate VAT using a margin scheme?

To calculate VAT under a margin scheme, you subtract the purchase price from the selling price and multiply the margin by 1/6. In this section, we guide you through the basic method and give examples. This will help you work out the VAT payable under a VAT margin scheme.

The calculation is fairly simple. It involves taking the VAT-inclusive purchase price away from the selling price.

What is the basic calculation method?

The basic method for calculating VAT using margin schemes is to subtract the purchase price from the sales price. This gives you the margin, which is the profit you made on the item.

Once you know the margin, you apply the VAT fraction (1/6 or 16.67%) to it to find the VAT payable. This means you pay VAT on the difference between the purchase and selling price, not on the full selling price.

For collectors’ items, the sum is slightly different. You assume that the profit from the sale of eligible collectors’ items includes VAT, and you divide the profit by 6.

So whether you deal in second-hand goods, works of art, antiques, or collectors’ items, you need to understand the basic method. It helps you pay the right VAT and comply with VAT Margin Scheme rules.

What do VAT margin scheme calculations look like?

Here are some practical examples of how VAT margin scheme calculations work. Suppose a business buys a second-hand item for £100 and sells it for £150. The margin is £50 (£150 - £100). To find the VAT payable, the business multiplies the margin by the VAT fraction (1/6). This equals £8.33 (£50 * 1/6).

In another example, a VAT-paying business buys an antique for £200 and sells it for £250. The margin is £50 (£250 - £200), and the VAT payable is again £8.33 (£50 * 1/6). These examples show how you can apply the basic method to different goods and sales. They help you work out the VAT payable under a VAT margin scheme accurately.

Conclusion

VAT margin schemes can be a powerful tool for businesses dealing in eligible goods. They offer reduced VAT rates, simpler sums, and a way to stay competitive, so they help businesses in many industries. But you need to understand the eligibility criteria, how to join, and how to calculate VAT. That way, you get the full benefit of these schemes and stay compliant.

Do you need help with your VAT compliance? Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.

How Taxually handles this

Taxually’s CrossTax handles VAT registration, VAT, OSS and IOSS returns and fiscal representation in the countries you sell into, and checks your sales data against 250+ validation rules before each filing. OneTax then pays every tax authority with one bulk payment in your chosen currency.

Related guides

• What is a VAT Loan? A Guide for UK Businesses
• HMRC VAT Registration Estimator Launched
• Selling from the UK to Europe after Brexit