What Is the VAT Margin Scheme?
The VAT margin scheme is a special method of accounting for VAT that allows eligible businesses to calculate VAT on the profit margin (the difference between the purchase price and the selling price) rather than on the full selling price. This avoids the double taxation that would otherwise arise when selling goods that were purchased without VAT being charged.
The scheme is set out in the VAT Act 1994 and is commonly used by businesses dealing in second-hand goods, works of art, antiques, and collectors’ items.
Why Does the Margin Scheme Exist?
Under normal VAT rules, a VAT-registered business charges VAT on the full selling price of goods and reclaims VAT on purchases. However, when buying second-hand goods from private individuals or non-VAT-registered businesses, there is no input VAT to reclaim (because no VAT was charged on the purchase).
Without the margin scheme, VAT would effectively be charged on the full value of the goods every time they are resold, creating cumulative taxation. The margin scheme solves this by restricting VAT to the value added by each seller.
Who Can Use the Margin Scheme?
The margin scheme is available to any VAT-registered business that buys and sells eligible goods. It is most commonly used by:
- Second-hand car dealers
- Antique and vintage dealers
- Art galleries and dealers
- Charity shops (for donated goods)
- Auctioneers (under specific auctioneer rules)
- Pawnbrokers
- Second-hand furniture and electrical goods dealers
- Mobile phone resellers (refurbished handsets)
Eligible Goods
The scheme applies to:
| Category | Examples |
|---|---|
| Second-hand goods | Used cars, furniture, clothing, electronics, books |
| Works of art | Paintings, drawings, sculptures, original prints |
| Antiques | Items over 100 years old |
| Collectors’ items | Stamps, coins, natural history specimens |
Conditions for Eligibility
The goods must have been purchased from one of the following:
- A private individual (not VAT-registered)
- A business that is not VAT-registered
- A VAT-registered business that sold the goods under the margin scheme or as an exempt supply
- A business that sold the goods and was unable to reclaim the input VAT
If you buy goods from a VAT-registered business that charged you VAT on the invoice, you cannot use the margin scheme for those goods — you must account for VAT in the normal way (and you can reclaim the input VAT).
How to Calculate VAT Under the Margin Scheme
Step 1: Determine the Margin
Margin = Selling price − Purchase price
Both prices are VAT-inclusive under the margin scheme. There is no separate VAT line on invoices.
Step 2: Calculate the VAT
If the margin is positive:
VAT due = Margin × 1/6
The 1/6 fraction extracts the 20% VAT element from the VAT-inclusive margin (since 20/120 = 1/6).
Step 3: Record the VAT
The VAT is included in Box 1 of the VAT return. The full selling price (not just the margin) goes in Box 6.
Example
| Item | Amount |
|---|---|
| Purchase price of second-hand car | £5,000 |
| Selling price | £7,500 |
| Margin | £2,500 |
| VAT due (£2,500 × 1/6) | £416.67 |
If the selling price is less than the purchase price (a negative margin), no VAT is due. Negative margins cannot be offset against positive margins on other items (unless using the global accounting method).
Global Accounting Method
For businesses selling large volumes of low-value items (typically under £500 each), the global accounting method simplifies the calculation. Instead of tracking margins on each individual item:
- Add up the total selling prices for the period
- Add up the total purchase prices for the period
- Calculate the overall margin for the period
- Apply the 1/6 fraction to the overall margin
This method allows negative margins on some items to be offset against positive margins on others within the same VAT period.
Conditions for Global Accounting
- Each item must have been purchased for £500 or less
- Goods are not of a type that would normally require individual records (cars, for example, are generally excluded)
- Records must still allow HMRC to verify the scheme is being applied correctly
Cars Under the Margin Scheme
Second-hand cars are the most common application of the margin scheme. Key rules for motor dealers:
- Each vehicle must be accounted for individually (global accounting is not permitted for cars)
- The purchase price includes any part exchange value
- Repair and refurbishment costs are not added to the purchase price — they are separate business expenses
- A stock book must be maintained recording each vehicle’s purchase and sale details
Part Exchanges
When a customer trades in a vehicle as part payment:
| Element | Value |
|---|---|
| New vehicle selling price | £15,000 |
| Part exchange allowance | £5,000 |
| Cash received from customer | £10,000 |
| Margin on new vehicle | £15,000 − purchase price of new vehicle |
The part-exchanged vehicle becomes stock. Its purchase price for margin scheme purposes is the part exchange value given to the customer.
Invoicing Under the Margin Scheme
When selling under the margin scheme, you must not show VAT separately on the invoice. The invoice should state:
- The total price inclusive of any VAT
- A note indicating the margin scheme applies, such as “This item is sold under the VAT margin scheme. No VAT is recoverable by the purchaser”
The buyer cannot reclaim any input VAT on a margin scheme purchase, even if they are VAT-registered.
Record Keeping
Businesses using the margin scheme must maintain detailed records:
Stock Book (Individual Items)
For each item, record:
- Stock number or identifying reference
- Date of purchase and supplier details
- Purchase price
- Date of sale
- Selling price
- Margin and VAT due
Purchase Records
Keep evidence of each purchase, including:
- Invoices from suppliers
- Written records of purchases from private sellers (showing the seller’s name and address, description of goods, and price)
- Part exchange documentation
VAT Return Records
Maintain workings showing how the margin scheme figures were included in each VAT return. All records must be kept for at least 6 years and maintained digitally under Making Tax Digital.
Common Mistakes
- Showing VAT separately on invoices — this invalidates the margin scheme for that transaction
- Using the scheme for goods purchased with VAT — if VAT was charged on the purchase invoice, use normal VAT accounting
- Failing to maintain a stock book — essential for individual items, especially cars
- Adding repair costs to the purchase price — only the original purchase price is used in the margin calculation
- Offsetting negative margins against positive margins on individual accounting (only allowed under global accounting)
Interaction with Other Taxes
The margin scheme is a VAT mechanism only. For corporation tax or income tax purposes, the profit on each item is calculated normally. The tax-deductible expenses associated with buying and selling goods (transport, storage, advertising) are claimed in the usual way.
Accurate accounting records must clearly distinguish between margin scheme transactions and normal VAT transactions to ensure both VAT and direct tax returns are completed correctly.