The VAT Margin Scheme is designed to be used by VAT Registered businesses that buy and sell:

  • Second – hand goods (Goods that can still be used, or which could be used after repair)
  • Works of art
  • Antiques
  • Collector’s items.

This allows VAT to be paid only on the difference between the price the item was bought for and the price it was sold for.

Why use the margin scheme?

Often when trading in second hand goods they will have been purchased from a non VAT registered individual and will also then be sold to a non VAT registered individual.

E.g: You are a VAT registered second hand car dealer who wishes to purchase a second hand car for £10,000 from a non VAT registered private individual and then sell it on for £12,000 to another non VAT registered private individual.

There is no VAT to recover on the purchase and therefore the cost will remain as £10,000. However on the sale, if you were not to use the margin scheme, the £12,000 is actually made up of £10,000 + £2,000 (20% VAT).

The £2,000 VAT charged will have to be paid to HMRC. Even if the non VAT registered buyer paid £12,000 he will be unable to recover the VAT Charged by yourself. As a result you will only have received £10,000 and so no profit has been made on this.

How will this scheme help me?

Using the above example, if qualified for and applied to use the margin scheme you would only pay HMRC VAT on the difference between the amount you bought the item for and the amount it was sold for.

Bought for £10,000 and sold for £12,000 but the VAT-able sale to be declared to HMRC is on the £2,000, therefore the VAT would be £333.33.

£333.33 would therefore need to be paid to HMRC resulting in a profit of £1,666.67.

Under what circumstance may I use this scheme?

  • Items bought from a non VAT registered business or individual
  • Items bought from a VAT registered business that is selling to you under the margin scheme

Record Keeping

When obtaining a purchase invoice the following should be present:

  • Date
  • Seller Name & Address
  • Buyer Name & Address (or the Business Name & Address)
  • Item’s Unique Stock Book Number (If bought from a VAT Registered Business)
  • Invoice Number
  • Item Description (Car Make, Model, Registration number)
  • Total Price – other costs should not be added to this price

When selling an item the sales invoice must include:

  • Date
  • Your Name, Address and VAT Registration Number  Buyer Name & Address (or the Business Name & Address)
  • Item’s Unique Stock Book Number
  • Invoice Number
  • Item Description (Car Make, Model, Registration number)
  • Total Price – VAT not to be shown separately

When selling and purchasing a vehicle, it is imperative that you mention that this is Margin Scheme on the invoices, otherwise it would not qualify for the scheme.

VAT records are to be kept for 6 years. If the current stock includes items which you obtained more than 6 years ago evidence will have to be retained that will show their eligibility for the margin scheme.

What should I do if I want to start using this scheme?

There is no need for you to register with HMRC separately to use the margin scheme. If your transactions meet the criteria outlined in this brief then you are eligible to apply the scheme to your Sales. This will be reported through your regular VAT Return Submissions.

You may also choose which transactions you wish to apply the margin scheme to and which you wish not to.

You would have to notify HMRC that you are using the Margin Scheme so that they can update their records.

Under the Margin scheme the following cannot be included, therefore VAT will have to be reclaim through Standard VAT instead:

  • Business Overhead
  • Repairs
  • Parts or accessories

What else should be considered?

It is very important to check if you are eligible to apply and use the margin scheme. You must ensure that the relevant disclosures are made on your sales invoice as outlined. Failure to comply could result in HMRC assessing that you are eligible to pay standard VAT on the full value of the sale rather than on the profit itself.

This article is based on the basis that sales are from one UK entity to another. This scheme may be applied to goods bought and sold outside of the UK however there are different rules for this which is outside the scope of this particular brief.

What is next?

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