VAT Margin Scheme for Second-Hand Goods

The second-hand good scheme is one of the VAT accounting schemes made available by HMRC to help businesses in the UK. Find out about the rules of the VAT margin scheme, which businesses are eligible to join the scheme along with the benefits of doing so.

Update 29 June 2021

1. Is there VAT on Second-Hand Goods?

There is VAT on second-hand goods if the seller is VAT registered. Generally, businesses are required to register for VAT with HMRC once their taxable turnover reaches a certain threshold, which for the tax year 2021/2022 is £85,000. This rule applies to businesses that sell second-hand goods. So if you have purchased something, you can check your receipt to see if the seller you have bought from is VAT registered.

If you check your receipt, you may see that the seller has charged the standard rate of VAT (or 5% depending on the product/service) or you may find that they use VAT margin scheme because they sell second-hand goods.

2. What is the VAT Margin Scheme?

Businesses using the standard VAT scheme, currently 20%, in general, will reclaim VAT on anything they buy and add VAT to everything they sell. If a business sells to other VAT registered businesses, then this is fine because VAT is not a cost to them.

There are other VAT rates that are applied for certain goods/services, you can find out these rates and how VAT works in this guide to VAT.

However, some second-hand goods businesses often buy and sell from businesses that are not VAT registered or to consumers. That means that once they reach the VAT threshold of £85,000, they’ll need to start charging VAT on all their sales. This can present a real problem to some second-hand businesses because once VAT registered they will have to:

  • Add VAT to their sales prices may make them uncompetitive in the marketplace;
  • Take VAT out from their sales price which will erode margins all because they’ve reached the VAT registration threshold.

HMRC introduced the VAT margin scheme to help businesses affected in this way to stop their profits suffering as a result of a VAT registration.

3. How to Does the VAT Margin Scheme Work?

The VAT margin scheme for second-hand goods lets a business pay VAT at 16.67% (one-sixth) of the difference between the price they pay for an item and what they sell that item for. Here is an example:

You run a second-hand watch business and are registered for VAT. You buy a watch for £1,500 from an individual (not VAT registered) and then sell it for £2,000 to another individual (also not VAT registered). 

Using the margin scheme, you will pay VAT on the difference between you bought & sold the watch at, £500.  Therefore you will pay VAT of £83.33.

If you were using the standard VAT scheme you would have had to either increase your selling price to £2,400. Or take VAT of £333.33 out of your selling price. Both these options present a problem for keeping your business competitive and profitable, so the margin scheme helps to reduce the impact of charging VAT.

4. Who Can Use the VAT Margin Scheme

Typical businesses that are eligible to use the VAT margin scheme include, those that sell:

  • second-hand goods;
  • works of art;
  • antiques;
  • collectors’ items.

This scheme does not apply to second-hand cars – a separate scheme exists for this type of business and you can read about this in a separate guide: VAT Margin Scheme for Cars Explained.

If you decide to use the scheme, then there are a number of conditions you need to meet. If you don’t meet them all you cannot use the scheme:

  • the goods must be eligible (second-hand goods, antiques or works of art);
  • you have acquired the goods in eligible circumstances. In most cases, that means 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);
  • you calculate the VAT margin in accordance with the rules of the scheme (see below);
  • you must meet the record-keeping rules of the scheme, including those regarding sales invoices, purchase invoices and stock books.

5. How to Register for the VAT Margin Scheme

You don’t actually need to register for the margin scheme! Once you are registered for VAT, you can simply start to use it provided you meet the strict conditions above.

6. What Sales To Include In Your Margin Scheme Calculations

The Second Hand Margin Scheme is not an all or nothing scheme. In other words, if you make a sale that does not meet all the conditions then you must account for VAT in the standard way. You’ll need to decide at the time of each sale whether you are going to apply to VAT Margin Scheme or standard scheme since you:

  • cannot go back at a later date and switch schemes;
  • must raise an appropriate sales invoice to reflect your choice of sale at the tax point.

VAT Margin Scheme Invoice Example & Record-Keeping

7. What Purchases To Include In Your Margin Scheme Calculations

The VAT Second Hand Margin Scheme applies to any sales and purchases that meet the criteria of the scheme. However, you may have paid for additional things which have VAT on them. You can claim back VAT on expenses that you have paid on any business overheads, repairs or accessories you buy just like anyone else who is on the standard VAT scheme. 

8. How to Calculate Your Margin

VAT under the margin scheme is the difference between what you paid for the item and what you sold it for. It may not be the same as your overall profit.

Say you buy something and pay for work to be carried out on it before you re-sell it. The VAT you pay will be based on the difference between the original cost of the item and the amount you sell it for, you will need to exclude any work you have done on it.

For example, you buy a used table for £500 and pay a restorer a further £500 to carry out work on the table. You subsequently sell the table for £1,500.  The margin applicable for working out VAT is £1,000 (£1,500 – £500).  Therefore you will pay VAT of £166.70 (£1,000 x 16.67%).

If you make a loss on an item then you do not need to pay VAT but you must still include it in your bookkeeping records.

Selling Price means the amount you sold the item for including any incidental costs you have charged to your customers, such as postage and packaging.

Purchase Price means the amount you paid for the item including any incidental costs you have been charged such as postage and packaging.

9. How to Fill Out Your Margin Scheme VAT Return

When you come to fill out your VAT return you’ll need to gather together the items you have sold from your second-hand goods stock book for the quarter you are reporting on.  Then you’ll need to total up the following figures ready for the VAT return boxes as follows:

  • Box 1 Include the output tax due on all eligible goods sold in the period covered by the return
  • Box 6 Include the full selling price of all eligible goods sold in the period, less any VAT due on the margin
  • Box 7 Include the full purchase price of eligible goods bought in the period.

Remember:

  • There is no need to include any figures in boxes 7 & 8;
  • Do not include any items you made a loss on;
  • You cannot set a loss on one item off against an item you made a profit on.

If you have made sales and purchases in the normal way, then you will need to add these figures to your margin scheme VAT figures and include the additional total amounts on your VAT return.

10. Businesses that Benefit from the VAT Margin Scheme

The scheme is ideally suited to anyone who sells second-hand goods to members of the public or non-VAT registered business such as sellers on:

  • eBay
  • Etsy
  • Amazon
  • Mobile phone re-sellers
  • Vintage clothes sellers

The margin scheme may not be suitable if you are selling any of the following and there are more specific schemes available that are better for these types of businesses:

11. How to Contact HMRC about VAT on Second-Hand Goods

The scheme can be tricky to navigate, if you have a question then start by calling HMRC 0300 200 3700 to get help or seek the advice of a professional. Errors can attract interest and penalties from HMRC.

12. 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. 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.

About Anita Forrest

Anita Forrest is a Chartered Accountant, spreadsheet geek, money nerd and creator of www.goselfemployed.co - a website full of templates, guides and resources for UK sole traders. No faff. No confusion. Just simple straightforward advice on business registration, taxes and bookkeeping.