fbpx

VAT Global Accounting Scheme Explained

The VAT Global Accounting Scheme is only available to certain types of businesses who sell:

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

You cannot use the scheme for aircrafts, boats and outboard motors, caravans and motor caravans, horses and ponies, and motor vehicles, including motorcycles.

In summary, eligible members of the VAT Global Accounting Scheme pay 1/6th of the difference between the number of items sold in a quarter and the amount you spent on new purchases.

Why is the VAT Global Accounting Scheme Beneficial

Once your business turnover meets the VAT registration limit (currently £85,000) you will be obliged to account for VAT at 20% on each of your sales. 

If you are a second-hand business who buys goods from non-VAT registered people/businesses and sell these products onto the general public this will mean:

  1. Adding VAT to your sales price which may make you uncompetitive in the marketplace;
  2. Taking VAT out from your sales price will erode your margins all because you have had reached the VAT registration threshold.

In order to help growing businesses who find themselves in this situation, HMRC introduced the VAT Global Accounting Scheme.

Each quarter they must:

  • Add up the value of all eligible sales for the quarter;
  • Add up the value of all eligible purchases for the quarter;
  • Deduct the one from the other and pay over 1/6th of the difference to HMRC as their VAT bill.

An Example of Working Out VAT Under the Global Accounting Scheme

You run a second-hand business and during your VAT quarter make sales of £10,000 and non-VATable purchases of £6,000.

Under the VAT Global Accounting Scheme, you will pay VAT of £666.67 (£10,000 – £6,000 = £4,000 *1/6th).

Under the standard VAT Scheme. you would have to pay VAT of £1,666.67 (£10,000 *20/120).

What Are Eligible Sales & Purchases

HMRC sets out strict criteria which you need to follow when working out whether your sales can be included in the VAT Global Accounting Scheme:

  • the goods must be eligible (second-hand goods, antiques or works of art);
  • you must have acquired the goods in eligible circumstances. In most cases, this means that you obtained the goods for resale in circumstances where you could not claim any VAT back (the most likely scenario is you bought your item from an individual);
  • if you paid VAT on the items you have purchased you cannot use the Global Scheme;
  • you cannot include any costs in regards to restoration or improvements when working out your purchase price;
  • individual items you have purchased for over £500 each cannot be included in the global accounting scheme (but you can use the VAT margin scheme for these items providing you meet the scheme’s criteria).

What Happens to Ineligible Sales & Purchases

If you find that you have made an ineligible sale or purchase then you cannot use the scheme and must pay/charge VAT as normal.

Who Is the Scheme Right For?

The VAT Global Accounting Scheme suits businesses who:

  • buy and sell bulk volume, low-value eligible goods, and
  • are unable to maintain the detailed records required of businesses who use the Standard VAT Margin Scheme

What About VAT on Overheads

It is important to remember that the VAT Global Accounting Scheme is not an all or nothing type scheme, so it doesn’t necessarily need to apply to all of your sales and purchases.

If you have paid out for VAT on overheads, like rent or marketing, then you can still claim this VAT back. 

This does mean you’ll need to calculate two sets of VAT figures and add them together for each VAT return you submit – one for sales/purchases under the VAT Global Accounting Scheme and another for everything that falls into the Standard VAT Scheme (and keep the right records for each scheme).

Record-Keeping & Invoicing

If you have chosen to use the VAT Global Accounting Scheme then you need to make yourself aware of the VAT records and invoice requirements affecting you. 

In addition, you also need to keep records in accordance with the Standard VAT Scheme especially if you are intending to claim back VAT on your overheads – so make yourself familiar with these rules as well. 

What VAT Records Should You Keep

Unfortunately, HMRC is a bit vague in their requirements but you need to have records which:

  • Are kept separately from your standard VAT records;
  • Shows how you reached the figures you have included in your VAT returns;
  • Demonstrate how you calculated your margin and tax due.

Don’t forget you need to keep all your VAT records for six years. So make sure you store everything away safely, in the cloud preferably.

What Needs to be Included on Purchase Invoices

Every time you buy goods which are eligible for the Global Accounting Scheme you must make sure you get the right paperwork to go with the purchase along with evidence that your goods are eligible).

The purchase invoice you keep on file must contain the following details:

  • your name and address;
  • your seller’s name and address;
  • an invoice number;
  • the date of the transaction;
  • a description of goods which must be sufficient to show that the goods are eligible for the Global Accounting Scheme, not just a generic description;
  • a total price – VAT must not be shown separately.

Who Should Provide You With a Purchase Invoice?

  • If you are buying for another business who also uses the Global Accounting Scheme, then they should provide you with a purchase invoice which includes all of the above information as well as a reference to the fact they are selling to you under the Global Accounting Scheme;
  • If you are buying from a private individual you may need to raise your own purchase invoice for your VAT records on your sellers behalf.  Again this should include all the above information.

What to Include on Your Sales Invoices

What you need to include depends on who you are selling to.

If you sell to other VAT Registered Dealers

You must always issue a sales invoice when you sell to another VAT registered dealers which shows the following details:

  • your name, address and VAT registration number
  • the buyer’s name and address
  • invoice number
  • date of sale
  • a description of goods which must be sufficient to show that the goods are eligible for the Global Accounting Scheme, not just a generic description;
  • total price including VAT (you must not show VAT separately);
  • the statement “Global Accounting Invoice”

Make sure you keep copies of all invoices you issue for your VAT records.

If you sell to the General Public

If you make sales for cash, for example using a cash register then you need to:

  • Make sure you have a system that clearly identifies sales to be included in the global scheme from any other sales you make;
  • Keep copies of takings summaries, till rolls etc to support your sales as part of your VAT records;
  • Have a clear audit trail from these sales to your VAT records

In both cases however you must make sure that your initial purchase also meets the criteria for the Global Accounting Scheme.

How to Calculate VAT Margin

Under the VAT Global Accounting Scheme, you pay VAT at 1/6th of the difference between the number of items you sell in a quarter and the amount you spent on new purchases. 

But there are rules that you need to follow when working out each of these figures, as well as special rules if you have:

  • recently joined the scheme;
  • have stock of goods on hand.

Calculating Your Sales

It is critical you identify which of your sales are going to be included within the Global Accounting Scheme before you start selling so you can make sure you create the right paperwork.

Once this has been correctly done, then it is just a matter of adding up all your eligible sales for the quarter and deducting the cost of your eligible purchases to reach your margin for VAT purposes.

Calculating Your Purchases

Under the Global Accounting Scheme although you don’t need to identify each individual purchase and sale you make for the purposes of working out your margin.

So if you buy in bulk you must make sure you keep the right paperwork to support each purchase you make. 

Then it is a matter of adding up all your eligible purchases for the quarter you are filing for.

You must make sure that you correctly identify your eligible sales and purchases correctly (with all the right paperwork).

In the event of an investigation where HMRC disagrees with your workings, HMRC will rework your calculations under the normal VAT scheme rules and make you pay the difference.

Calculating Your VAT Margin

Once you have your sales and purchases figures you then need to multiply the difference by 1/6th.

Here’s an example:

Sales: £20,000

Purchases £8,000

Difference £12,000 (£20,000 – £8,000)

VAT £2,000 (£12,000 * 1/6th)

Calculating Your VAT Margin

Once you have your sales and purchases figures you then need to multiply the difference by 1/6th.

Here’s an example:

Sales: £20,000

Purchases £8,000

Difference £12,000 (£20,000 – £8,000)

VAT £2,000 (£12,000 * 1/6th)

Handling Purchases Over £500 Under the VAT Global Accounting Scheme

Individual items that you have purchased for over £500 each cannot be included in the global accounting scheme (but you can use the VAT margin scheme for these items providing you meet this schemes criteria). 

However, there may be scenarios where you have bought collections of goods or combined items to resale where the individual value is under £500.

Here are the HMRC rules:

Ifthen
you split collections of items, such as stamp collections, and either sell the items separately or use them to form other collectionsyou can account for those sales under Global Accounting, provided all the items are eligible.
you purchase an eligible item for £500 or more, and the item is made up of several components valued at less than £500, but you sell the component items individually 
(For example, you purchase a tea set for £600 and you sell the cups and saucers individually for £50 each.)you can account for the sales under Global Accounting.
you purchase an eligible item for £500 or more, and the item is made up of several components valued at less than £500, and you sell the item in the same state as it was purchased (For example, you purchase the tea set for £600, but you sell it on as a tea set.)you can not account for the sale under Global Accounting. You may account for the sale under the Margin Scheme, provided you can meet the recordkeeping requirements.
you combine two or more items to produce only one item for resale, (For example, you use one item as a spare part for another.)you can account for the sale under Global Accounting.
you buy eligible items and use them to produce something which is not eligible, 
(For example, you buy second-hand fabrics and trimmings and make them into cushion covers.)you can not account for the sale under either Global Accounting or the Margin Scheme, you must sell the item under the normal rules and account for VAT on the full selling price.

How to Register

You don’t actually need to apply to use the VAT Global Accounting Scheme, you can just start using it. 

However, it’s worth noting that the rules of the scheme are very complicated and there are penalties for using it incorrectly. It is important to seek professional advice if you are unsure about your eligibility or how to use it.

VAT Second Margin Scheme v. Global Accounting Scheme

The Second Hand Margin Scheme and Global Accounting Scheme are similar in principle, with the Global scheme being a simplified version of the margin scheme.

What are the Key Differences Between the Two Schemes

Although similar at a high level, there are differences between the second margin scheme and global scheme:

  1. Under the margin scheme you must work out the margin on each and every sale, whereas with the margin scheme you add up all eligible purchases and sales on a total basis quarter by quarter and take 1/6th of the total difference;
  2. With the Global Scheme you can include items on which you make a loss on whereas with the second-hand margin scheme you cannot set the loss of one item against the profit of another;
  3. You cannot use the global accounting scheme for any individual item that you purchase for over £500 whereas there is no limit for the second-hand margin schemes.

The VAT Global Scheme is suitable if you buy and sell in bulk and therefore unable to track individual sales.

Updated: 11 April 2019

Anita Forrest
About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - a UK small business finance blog where she shares help and advice with the self-employed community to make topics like registering a business, bookkeeping and taxes easy to understand.