HMRC has designed the VAT Margin Scheme (also nicknamed the ‘Second Hand Goods Scheme’) for businesses who buy goods from individuals who are not VAT registered but are VAT registered themselves. This can bring real benefits to VAT registered businesses who trade on the internet using their own websites or platforms such as eBay & Etsy selling second hand or reconditioned goods.
Who Can Use the VAT Margin Scheme
Typical businesses that can apply to join the VAT margin scheme include:
- second-hand goods
- works of art
- collectors’ items
This scheme does not apply to Second Hand Cars – a separate scheme exists for this type of business.
How Does the VAT Margin Scheme Work
Normally a VAT registered business will reclaim VAT on everything they purchase and add VAT To everything they sell, which is fine if they buy and sell goods to/from other VAT registered businesses. However if you operate a second hand goods business, you may be buying & selling used goods to & from individuals who are probably not VAT registered.
As a business you are required to register for VAT once your turnover reaches the VAT registration threshold (for 2018/2019 this is £85,000) meaning you’ll face two challenges if you buy and sell from the general public:
- Adding VAT to your sales price may make you uncompetitive in the marketplace;
- Taking VAT out from your sales price will erode your margins all because you have had reached the VAT registration threshold.
The VAT Margin Scheme can really benefit business affected by the above challenges: under the rules of the scheme you pay VAT at 16.67% (or 1/6th) of the difference between what you bought the item for and what you sold it for (rather than the standard rate of 20% on the sales price).
An Example of the VAT Margin Scheme
You run a second hand watch business and buy a watch for £1,500 from an individual (not VAT registered), 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, making you potentially uncompetitive or take VAT of £333.33 out of your selling price. As you can see, the VAT margin scheme is very beneficial to second hand businesses who sell to individuals.
How to Start Using the VAT Margin Scheme
Once you hit the VAT registration threshold, you only need to register for the standard VAT scheme but there is no additional registration required to use the VAT Second Hand Margin Scheme. It is your own responsibility to make absolutely sure you are eligible to use the scheme, that you meet the required criteria and apply it correctly to sales.