What is the VAT margin scheme?

How does the margin scheme work?

Second-hand goods are usually bought from private individuals, who cannot charge VAT. Under normal rules the dealer would then have to charge VAT on the whole selling price with nothing to reclaim, taxing the same item twice over its life. The margin scheme fixes that by taxing only the dealer's margin.

The VAT is worked out as the VAT fraction of the margin — at the 20% standard rate, one sixth of the difference between purchase price and selling price. It is not shown separately on the invoice, and the buyer cannot reclaim it. If an item is sold at a loss, there is no VAT to pay on it, and the loss cannot be set against the margin on another item unless the business uses the global accounting variant.

The scheme is optional, item by item. Each item must be recorded in a stock book with its purchase and sale details, and there are specific rules about what the purchase and sales invoices must say. Lose the records and HMRC will charge VAT on the full selling price instead.

A worked example

A used-car dealer buys a car from a private seller for £4,000 and sells it for £5,500. The margin is £1,500. VAT under the scheme is one sixth of that, £250. Under normal rules he would owe VAT on the full £5,500, which at the standard rate is £916.67 with nothing to reclaim — so the scheme saves him £666.67 on this one car.

The next month he buys a car for £3,200, finds it needs more work than expected, and sells it for £3,000. The margin is negative, so no VAT is due on that car, but the £200 loss does not reduce the VAT on the first one. The repair costs, bought from a VAT-registered garage, are outside the scheme and their input VAT is reclaimed as normal.

What are the common mistakes?

• —Showing VAT as a separate line on a margin scheme invoice, which is not permitted and lets the buyer try to reclaim it.
• —Including repair or refurbishment costs in the purchase price to reduce the margin. They are normal input VAT, not part of the margin.
• —Using the scheme for goods bought with a VAT invoice from a registered business. Those go through normal VAT.
• —Netting losses against gains without being on global accounting.