Understanding the VAT Margin Scheme for Second-Hand Goods
The VAT Margin Scheme is a specialized VAT accounting method designed to assist businesses dealing with second-hand goods. This guide explains how the VAT Margin Scheme operates, who is eligible to use it, and the advantages it offers.

Table of Contents

1. Is There VAT on Second-Hand Goods?

2. What is the VAT Margin Scheme?

3. How Does the VAT Margin Scheme Work?

4. Who Can Use the VAT Margin Scheme?

5. How to Register for the VAT Margin Scheme

6. What Sales to Include in Your Margin Scheme Calculations

7. What Purchases to Include in Your Margin Scheme Calculations

8. How to Calculate Your Margin

9. How to Fill Out Your Margin Scheme VAT Return

10. Businesses that Benefit from the VAT Margin Scheme

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

12. VAT Margin Scheme vs. Global Accounting Scheme

Friendly Disclaimer: While I am an accountant, the information provided here is for guidance only and may not suit every individual situation. Always consult a qualified professional for tailored advice to avoid potential penalties.

1. Is There VAT on Second-Hand Goods?
Yes, VAT applies to second-hand goods if the seller is VAT registered. Businesses must register for VAT with HMRC once their taxable turnover exceeds £85,000 for the 2021/2022 tax year. If you buy second-hand goods, check the receipt to see if the seller is VAT registered.

2. What is the VAT Margin Scheme?
Under the standard VAT scheme, businesses reclaim VAT on purchases and charge VAT on sales. For second-hand goods businesses, this can be problematic as VAT registration requires them to add VAT to their sales prices, potentially affecting competitiveness and profit margins.
The VAT Margin Scheme was introduced to address these issues. It allows businesses to pay VAT on the profit margin (the difference between the purchase price and the selling price) rather than the total sale price.

3. How Does the VAT Margin Scheme Work?
The VAT Margin Scheme calculates VAT at 16.67% (one-sixth) of the margin between the purchase price and the selling price. For example:
If you buy a second-hand watch for £1,500 and sell it for £2,000, the margin is £500. VAT on this margin would be £83.33.
Without the margin scheme, using the standard VAT rate, you would have to increase the selling price to £2,400 or absorb a VAT cost of £333.33, which could impact your business's competitiveness.

4. Who Can Use the VAT Margin Scheme?
The VAT Margin Scheme is available for businesses that deal in:

• Second-hand goods

• Works of art

• Antiques

• Collectors' items

Note: This scheme does not apply to second-hand cars; a separate scheme is available for such vehicles.
To use the scheme, businesses must:

• Sell eligible goods (second-hand items, antiques, or works of art)

• Acquire goods in a manner where VAT was not reclaimable (e.g., from individuals)

• Follow margin scheme rules for VAT calculation and record-keeping.

5. How to Register for the VAT Margin Scheme
There is no separate registration process for the VAT Margin Scheme. Once registered for VAT, businesses can start using the scheme if they meet the conditions.

6. What Sales to Include in Your Margin Scheme Calculations
The Margin Scheme is not an all-or-nothing approach. You must decide on a sale-by-sale basis whether to apply the margin scheme or the standard VAT scheme:

• Sales meeting the margin scheme criteria should be processed under this scheme.

• Sales not meeting the criteria must follow the standard VAT scheme.

Once a choice is made for a sale, it cannot be changed retrospectively.

7. What Purchases to Include in Your Margin Scheme Calculations
Under the Margin Scheme, VAT is calculated based on the margin, not the total sale price. However, VAT on additional costs related to business overheads or repairs can be reclaimed under the standard VAT scheme.

8. How to Calculate Your Margin
To calculate VAT under the Margin Scheme:

• Determine the difference between the purchase price and the selling price.

• Exclude any additional costs or work done on the item from this calculation.

For example, if you buy a table for £500, spend £500 on restoration, and sell it for £1,500, the margin is £1,000 (£1,500 - £500). VAT would be £166.70 (£1,000 x 16.67%).
Losses on items do not require VAT payment but must be recorded.

9. How to Fill Out Your Margin Scheme VAT Return
For your VAT return, gather data on sales and purchases under the Margin Scheme for the reporting period:

• Box 1: Include the VAT due on margin sales.

• Box 6: Report the total selling price of margin goods sold.

• Box 7: Report the total purchase price of margin goods bought.

Remember:

• Do not include figures in boxes 7 & 8 for margin scheme items.

• Exclude items sold at a loss from your calculations.

• Do not offset losses against profits from other items.

Include sales and purchases processed under the standard VAT scheme separately on your VAT return.

10. Businesses that Benefit from the VAT Margin Scheme
The scheme is advantageous for businesses selling second-hand goods to the public or non-VAT registered entities, such as:

• eBay sellers

• Etsy sellers

• Amazon sellers

• Mobile phone resellers

• Vintage clothing sellers

For certain products like second-hand cars, horses, or high-volume low-price items, other schemes or accounting methods might be more appropriate.

11. How to Contact HMRC about VAT on Second-Hand Goods
If you need assistance with the VAT Margin Scheme, contact HMRC at 0300 200 3700 or seek advice from a professional to ensure compliance and avoid potential penalties.

12. VAT Margin Scheme vs. Global A counting Scheme
The VAT Margin Scheme and the Global Accounting Scheme are similar but have key differences:

• Margin Scheme: VAT is calculated individually for each sale based on the margin.

• Global Scheme: VAT is calculated on the total margin of all eligible purchases and sales on a quarterly basis, and losses can be included.

The Global Scheme is suitable for bulk sellers who may not track individual sales.