In this blog, we will discuss the basics of UK VAT Margin Scheme and the key principles of the scheme.
If you run a business in the UK that buys and sells second-hand goods, you may have heard of the VAT Margin Scheme. It can sound technical at first, but the idea is actually quite straightforward when explained in simple terms. In short, it is a way of calculating VAT only on the profit you make when selling certain goods, rather than on the full selling price.
Basics of the Margin Scheme
Under the VAT Margin Scheme, you work out VAT based on the difference between what you paid for an item and what you sold it for. This difference is called the “margin.” Instead of charging VAT on the full selling price, you only account for VAT on this margin. For example, if you buy a second-hand chair for £100 and sell it for £160, your margin is £60, and VAT is calculated only on that £60, not on £160. If you sell an item for the same price you bought it for, such as buying for £200 and selling for £200, your margin is zero and no VAT is due.
If you make a loss, the rules are also simple. For instance, if you buy something for £150 and sell it for £120, you have made a loss of £30. In this case, you do not pay any VAT, but you also cannot reclaim any VAT on that loss. The scheme is mainly used by businesses dealing in second-hand goods, antiques, works of art, and collectors’ items, especially when those goods are bought from private individuals or others who did not charge VAT.
When can you use the scheme
To use the scheme correctly, there are a few key conditions. The goods must be eligible, you must have bought them without VAT being charged (or from someone who could not charge VAT), and you must keep proper records of each purchase and sale.
Another important point is that you cannot reclaim VAT on purchases made under the margin scheme. When it comes to invoices, you do not show VAT separately to your customer. Instead, you include a note such as “VAT margin scheme, second-hand goods.”
The Margin
One important detail is how VAT is calculated within the margin. At the UK standard VAT rate of 20%, the VAT portion is 1/6 of the margin. So, if your margin is £60, the VAT included in that margin is £10. This means the VAT is already included in your selling price rather than added on top.
Overall, the VAT Margin Scheme is designed to make things fairer for businesses dealing in second-hand goods. It ensures you are only taxed on the value you add, rather than the full resale price. As long as you keep clear records and follow the rules, it can be a simple and practical way to handle VAT.
Contact us now to learn more about this scheme and to see whether or not you are eligible for this scheme.
