Definition of a VAT margin scheme
A VAT margin scheme is used to tax the difference between the amount that a business pays for certain items and the amount that it later sells those items for. VAT is charged on this difference at a rate of 16.67% (one-sixth).
A business can choose to use a VAT margin scheme when it sells:
- second-hand goods
- works of art and antiques
- collectors’ items
Businesses cannot use VAT margin schemes for:
- any item they buy on which they are charged VAT
- the sale of precious stones or metals, including investment gold
Businesses do not have to apply to use a VAT margin scheme but should keep a record that includes a stockbook and invoices for sales and purchases. The business should then report any goods sold using a margin scheme on its VAT return.
There are further rules for the sale of certain second-hand vehicles, horses and ponies and houseboats and caravans. Auctioneers, dealers and pawnbrokers are also subject to additional rules.
Businesses that sell high volumes of low-priced qualifying items (under £500 per item) may be eligible to use a simplified VAT margin scheme called the Global Accounting Scheme.
You should either speak to an accountant or check with HMRC if you’re in any doubt about using a VAT margin scheme.
Example of a VAT margin scheme in action
A VAT-registered business buys an antique bookcase from a member of the public for £1,000. As the member of the public is not registered for VAT, the business pays no VAT when it purchases the bookcase.
The business sells the bookcase for £1,400 at a later date. Using the VAT margin scheme for antiques, the business pays VAT to HMRC at a rate of 16.67% on the difference of £400. This means that the business owes £66.68 in VAT, which it reports on its next VAT return.
Disclaimer: The content included in this glossary is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circ*mstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this glossary. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.
