The VAT margin scheme saves money for businesses whose turnover has reached the VAT registration threshold, but buy and sell second-hand or reconditioned goods to the general public or non-VAT registered businesses.
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 once their taxable turnover reaches £85,000 for 2019/2020.
Once registered, they must add VAT at the standard rate of 20% unless they sell a product that attracts a lower rate of VAT or they use the second-hand margin scheme.
What is the VAT Margin Scheme?
Businesses using the standard VAT scheme normally need to 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.
However, some second-hand goods businesses tend to buy/sell to/from businesses that are not VAT registered.
That means that once they reach the VAT registered threshold (£85,000 for 2019/2020) they need to start charging VAT on all sales to their customers.
For second-hand businesses, this can present a real problem because once VAT registered they need to:
- Add VAT to their sales prices may make them uncompetitive in the marketplace;
- Take VAT out from your sales price which will erode margins all because they’ve reached the VAT registration threshold.
The margin scheme is perfect for businesses who find themselves in this position.
The margin scheme lets a business pay VAT at 16.67% (one-sixth) of the difference between the price you pay for an item and what you sell it on for.
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, making you potentially uncompetitive. Or take VAT of £333.33 out of your selling price.
Registering for the Margin Scheme
Typical businesses that are eligible to use the VAT margin scheme include, those that sell:
- 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.
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.
The Main Conditions of the Second Hand Margin Scheme
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.
If all your sales meet these conditions for both your item purchase and onward sale, then all your sales will meet the criteria of the VAT Second Hand Margin Scheme so you can apply the scheme (if you wish).
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 the appropriate sales invoice to reflect your choice of sale at the tax point.
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 reclaim VAT you have paid on any business overheads, repairs or accessories you buy just like anyone else who is on the standard VAT scheme.
Just make sure you do not include any of these costs when you work out your second-hand margin for VAT purposes.
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%).
What is the Selling Price?
The selling price is the amount you sold the item for including any incidental costs you have charged to your customers, such as postage and packaging.
What is the Purchase Price?
This is the amount you paid for the item including any incidental costs you have been charged such as postage and packaging.
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.
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 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.
You should note:
- 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 is the normal way, then you will need to add these figures to your Margin Scheme VAT Figures and include the total amounts in your VAT return.
Can Buyers Claim Back VAT on Second-Hand Goods?
No buyers cannot claim back VAT on second-hand goods bought under the margin scheme.
Under the scheme, you do not issue VAT invoices. Instead, sales invoices do not have a separate line for VAT, just to total sales prices is shown.
Who Should Use the 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:
- 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:
- second-hand cars
- horses and ponies
- high volume, low price items which might be better suited to the Global Accounting Scheme, a simplified version of the margin scheme
How to Contact HMRC about VAT on Second-Hand Goods
The scheme can be tricky to navigate, if you have a question then call HMRC 0300 200 3700.
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:
- 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;
- 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;
- 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.