If your business buys or sells second-hand goods, you can use a VAT margin scheme to simplify your VAT accounting. Margin schemes allow you to calculate VAT based on the profit margin rather than the full sale price. Read about margin schemes, when you can use them, and how they can save you VAT.

What Are VAT Margin Schemes?

VAT margin schemes apply to businesses that buy and sell second-hand goods. Rather than charging VAT on the full sale price, you only pay VAT on the difference between what you paid for the goods and what you sold them for – i.e. your profit margin.

Margin schemes are commonly used by businesses that trade in used goods like antiques, art, cars, boats, and horses. However, any business can use them when buying or selling second-hand items. For example, you might buy used office equipment or company cars and later resell them.

When Can You Use a Margin Scheme?

You can generally use a VAT margin scheme when:

• You buy second-hand goods from a private individual
• You buy from a business that also used the margin scheme for that sale
• You buy used goods from a VAT-registered business that did not use the margin scheme

In the latter case, ask if they can treat the sale outside the margin scheme so you can reclaim VAT.

How Do Margin Schemes Work?

With a margin scheme, you:

• Do not charge VAT on the full sale price when reselling the goods
• Only charge VAT on the difference between your purchase price and sale price
• Do not provide a VAT invoice to the buyer

For example, if you buy a used car for £5,000 and later sell it for £7,000, your profit margin is £2,000. You would charge 20% VAT on £2,000, which is £400. The total sale price would be £7,400.

Without the margin scheme, you would charge 20% VAT on the full £7,000 sale price, which is £1,400.

Using Margin Schemes to Save VAT

Margin schemes can potentially help you save VAT in certain situations:

If you buy second-hand goods from a VAT-registered business and they treat it as a margin scheme sale, you cannot reclaim input VAT. However, ask them to treat the sale as outside the margin scheme. This increases the purchase price but allows you to reclaim VAT. Your net cost after reclaiming VAT is then lower.

For example, say a dealer sells you a used van for £10,000. Treated as a margin scheme sale, you cannot reclaim VAT, so your net cost is £10,000. If they charge you VAT, the van costs £12,000. You can reclaim the £2,000 VAT charged, so your net cost is only £10,000. You save £1,000.

Selling Second-Hand Goods

When reselling goods originally bought second-hand:

• If you sell for less than you paid, you do not charge VAT
• If you sell for more, charge VAT only on the profit margin
• Do not provide the buyer with a VAT invoice

Using the earlier example, you would not charge VAT if you bought the used van for £10,000 and sold it for £9,000. If you sold it for £11,000, you would charge 20% VAT on your £1,000 margin so that the sale price would be £11,200.

Margin schemes can simplify VAT accounting when buying or selling used goods. Be aware of when you can use them to minimize your VAT costs. And remember to ask sellers to treat purchases as outside margin schemes so you can reclaim VAT.