Understanding VAT can sometimes feel like trying to solve a puzzle in the dark. There are rules, exceptions, and special schemes that can make things confusing even for experienced business owners.

One of these is the VAT margin scheme, a scheme designed to change how VAT is calculated on certain second-hand goods, antiques, and works of art. If you deal in these types of goods, understanding how the VAT margin scheme works can help you decide whether it is right for your business.

In this guide, we’ll explain exactly what the scheme is, how to use it correctly, the types of goods it applies to, the benefits and limitations, and what HMRC expects in terms of record-keeping and VAT returns.

What is the VAT margin scheme?

The VAT margin scheme is a special way of calculating VAT on sales of certain goods. Instead of charging VAT on the full selling price of an item, you only charge VAT on the margin. 

What does it mean by margin?

A margin is the difference between what you paid for the item and what you sell it for. This means that if you make a small profit on resale, you pay VAT only on the profit rather than the full price. For businesses that trade in second-hand items, the VAT margin scheme can result in a much lower VAT liability and the ability to offer more competitive prices for customers. 

Under the scheme, you still charge VAT, but only on part of the value. This is especially useful when selling goods that already had VAT applied at an earlier stage or where the VAT status of the item is unclear. 

{{payroll-guide}}

Who can use the VAT margin scheme?

Not every business can use the margin scheme. It’s only available for certain types of goods and transactions.

Eligible businesses

You can use the VAT margin scheme if:

• You are VAT registered.
• You sell eligible goods, such as second-hand goods, works of art, antiques, or collectables.
• You acquired the goods without being charged VAT that you could reclaim.
• You keep the required margin scheme records.

Even if you bought the goods from another business that also used the VAT margin scheme, you can continue to apply the scheme when you sell them.

Ineligible businesses

You cannot use the margin scheme if:

• You sell new goods or goods bought from a VAT-registered supplier where you reclaimed VAT.
• You sell services only.
• You sell goods that are not included in the scheme’s categories. 

If you’re unsure whether goods are eligible, it’s essential to check before applying the scheme. 
‍

What goods qualify under the scheme?

Here’s a breakdown of the main types of goods that can qualify for the VAT margin scheme, along with some typical examples and eligibility notes.

Goods may also qualify if they were bought from another VAT-registered business that sold them using the VAT margin scheme.
‍

How VAT is calculated with the scheme

Here’s the simple rule under the margin scheme:

1. Determine your margin:

Margin = Selling price - Purchase price

2. Apply the VAT rate to the margin

The standard UK VAT rate is 20%. To calculate the VAT due on your margin, you can use this formula:

VAT due = Margin x 20 ÷ 120.

This method ensures you pay VAT only on the profit portion of the sale, rather than the full price. This helps keep your VAT liability lower and your prices more competitive.

Example

If you buy a second‑hand watch for £200 and sell it for £300:

• Margin = £300 − £200 = £100
• VAT due = £100 × 20 ÷ 120 = £16.67

So, instead of paying £60 VAT on the full £300, you only pay £16.67 because the VAT is applied only to the margin.

What if you sell for less than you paid?

If you sell an item for less than the price you paid, your margin is zero or negative. In this case, no VAT is due under the margin scheme. You cannot create a loss to offset other profits for VAT purposes.

For example, buying a vintage toy for £100 and selling it for £90 gives a negative margin. In this scenario, the margin is zero for VAT purposes, so no VAT is charged on the sale.
‍

Record-keeping requirements

HMRC requires detailed records when you use the margin scheme. You must retain:

For each item sold under the scheme:

• Unique reference or stock number for each item sold under the scheme.
• The purchase price and date.
• The selling price and date.
• Proof you did not reclaim VAT on the purchase.
• A statement that the item was sold under the margin scheme.

Margin Scheme Accounting

Your VAT records must clearly separate sales under the margin scheme from standard VAT sales. Typical records include:

• Copies of supplier invoices or receipts.
• Unique references/stock numbers for each item.
• Sales invoices or receipts showing the selling price.
• A margin account that tracks purchases and sales for each item.
• Reconciliations that show how the margin was calculated

Accurate records are essential in case HMRC requests them in an audit. If you fail to maintain proper records, HMRC can challenge your use of the scheme and assess VAT on full selling prices.
‍

VAT returns and the margin scheme

When you submit your quarterly VAT return, you report total sales under the margin scheme, total margin on those sales, and the VAT due on the margin.

These amounts go in the appropriate boxes on the VAT return form. Many accounting software packages (like Crunch!) can handle margin scheme tracking and reporting, but you must configure them correctly.

You do not show VAT charged separately on customer invoices under the scheme. Instead, the sale is treated as:

“Margin scheme — VAT accounted on margin”

This is a legal requirement and helps prevent confusion for customers and HMRC.
‍

Advantages of the VAT margin scheme

The VAT margin scheme has several clear benefits. Including:

Lower VAT liability

Since VAT is calculated only on the margin, the amount you pay to HMRC is often much lower than under standard VAT accounting.

Competitive pricing

You can sell second‑hand items with VAT built in without inflating the price by charging full VAT on the selling price.

Cash flow benefit

Lower VAT payments mean you keep more money in your business, which can help with day‑to‑day cash flow.

Useful for certain sectors

Dealers in second‑hand goods, art galleries, antique shops, and used car dealerships often find the margin scheme essential to remain competitive.

{{income-tax-calculator}}

Limitations and important considerations

While the scheme is useful, there are some key restrictions and considerations:

No reclaim on purchase VAT

The margin scheme only applies to goods where you did not reclaim VAT on the purchase. If you claimed input tax on the item, you cannot use the margin scheme and must account for VAT under the standard rules.

No inclusion of VAT on costs

Costs such as repairs, restoration, or refurbishment must not be added to the purchase price when calculating the margin. The margin is simply the selling price minus the purchase price.

Must be distinct from standard sales

If you sell some items under the standard VAT method and others under the margin scheme, you must keep accounts and records for each method separately.

Mixed consignments

If you buy a lot of mixed goods from an unclassified source (such as a garage sale), you must decide what portion is eligible and keep records that justify that allocation.
‍

Auctioneers and the VAT margin scheme

HMRC has a specific version of the margin scheme for auctioneers. If you sell items on behalf of third parties, the rules differ a little. Key points include:

• You need to show that goods were taken in on sale or return.
• You must allocate the margin correctly between you and the original owner.
• Special accounting rules apply for auction sales.

If you do a high volume of auction sales, it’s essential to check HMRC’s guidance specifically for the auctioneers’ margin scheme.
‍

Frequently asked questions

Can I voluntarily register for VAT just to use the margin scheme?

Yes. Even if your turnover is below the VAT threshold, you can register voluntarily. If you are confident the margin scheme will benefit your pricing and cash flow, voluntary registration may make sense.

What happens if HMRC disallows an item under the scheme?

If HMRC finds that an item should not have been included in the margin scheme, they can reassess VAT on the full selling price and charge penalties.

Can I charge customers VAT separately if I use the margin scheme?

No. Under the margin scheme, you do not itemise VAT on customer invoices. The selling price includes VAT on the margin, but you do not show a separate VAT amount.
‍

Getting the VAT margin scheme right

The VAT margin scheme comes with specific rules and record-keeping requirements, and getting it wrong can be costly. Having the right accounting support in place can help ensure it is applied correctly and stays compliant with HMRC.

With Crunch, you get expert UK-based accountants who can help you understand whether the VAT margin scheme is right for your business and make sure it’s handled properly within your VAT returns, so you can focus on running your business with confidence.

‍