VAT margin scheme: second-hand goods, art and antiques

If a dealer buys a used car from a private seller, no VAT is charged on the purchase. Without a special rule the dealer would charge 20% VAT on the full price when selling it, taxing value that has already borne VAT when the car was first sold new. Margin schemes fix this by charging VAT only on the dealer’s mark-up.

Which goods can use a margin scheme

Margin schemes are available for:

• second-hand goods: tangible movable property suitable for further use as it is or after repair, such as cars, furniture, clothing, electronics and machinery
• works of art: paintings, drawings, sculptures, limited-edition prints and some photographs, as defined in VAT Notice 718
• antiques: items more than 100 years old
• collectors’ items: stamps, coins, banknotes and items of zoological, historical or archaeological interest

They cannot be used for precious metals, investment gold, or new goods.

How the VAT is calculated

VAT is due on the margin, which is the selling price minus the purchase price. The margin is treated as VAT-inclusive, so at the 20% standard rate the VAT is one-sixth of the margin.

Example: a used car

A dealer buys a used car from a private seller for £8,000 and sells it for £10,400.

If a car is sold for less than it cost, no VAT is due on that sale, but the loss cannot be set against the margin on other sales under the standard scheme.

Costs of repairs and preparation are not added to the purchase price when working out the margin. You reclaim the VAT on those costs, such as parts and valeting, on your VAT return in the normal way.

Conditions for using the scheme

You can only use a margin scheme for goods you bought:

• from a private individual or a business that is not VAT-registered
• from another VAT-registered dealer who sold them under a margin scheme
• from an insurance company that took them over as part of a claim settlement, where no VAT was charged
• in a few other situations listed in VAT Notice 718, such as certain imported works of art

If you were charged VAT on the purchase and reclaimed it, the goods must be sold under normal VAT rules.

You can choose, sale by sale, not to use the scheme and charge VAT normally on the full price, for example where a VAT-registered business customer wants a VAT invoice so it can reclaim the VAT.

Records and invoices

Margin scheme dealers must keep:

• a stock book (paper or digital) recording each item: stock number, description, purchase price and date, who it was bought from, selling price and date, who it was sold to, and the margin
• purchase invoices for each item, including self-billed purchase invoices where you buy from private sellers
• sales invoices for each item

Your sales invoice must not show VAT separately. It should include a statement that the goods are sold under the margin scheme, such as “Margin scheme: second-hand goods” (or works of art, antiques or collectors’ items as appropriate). The buyer cannot reclaim any VAT on a margin scheme purchase.

On your VAT return, the output VAT on margins goes in box 1, and the full selling prices (excluding the VAT on the margin) go in box 6.

The Global Accounting Scheme

Keeping item-by-item records is impractical for dealers in high-volume, low-value goods, such as second-hand clothes or furniture shops. The Global Accounting Scheme lets you calculate VAT on the total margin for the VAT period:

• total sales of eligible goods in the period, minus
• total purchases of eligible goods in the period, gives
• the total margin, of which one-sixth is VAT at the standard rate

Global accounting is only for items bought for £500 or less each. It cannot be used for cars, motorcycles, caravans, motorhomes, boats, outboard motors, aircraft, horses or ponies, which must use the standard margin scheme. If purchases exceed sales in a period, the negative margin is carried forward to the next period.

Auctioneers’ scheme

Auctioneers selling eligible goods on behalf of non-VAT-registered sellers can use a separate auctioneers’ scheme, which calculates VAT on their commission and charges rather than on the hammer price. VAT Notice 718 sets out the conditions.

Margin schemes and other VAT schemes

• You cannot use the Flat Rate Scheme and a margin scheme together. Joining a margin scheme excludes you from the Flat Rate Scheme.
• Goods bought or sold under a margin scheme cannot be accounted for under the Cash Accounting Scheme.
• Tour operators use a different system, the Tour Operators’ Margin Scheme, which is not covered here.

Frequently asked questions

How is VAT calculated under the margin scheme?

Take the selling price, subtract the purchase price and multiply the margin by one-sixth (for goods at the 20% standard rate). That is the VAT due.

Can my customer reclaim VAT on a margin scheme car?

No. The invoice does not show VAT, so a VAT-registered buyer cannot reclaim any. If the buyer needs to reclaim VAT, you can choose to sell outside the scheme and charge VAT on the full price.

Do I need a stock book for the margin scheme?

Yes, for the standard margin scheme. Each item must be recorded individually, from purchase to sale. Dealers using global accounting keep records of total eligible purchases and sales instead.

Can I use the margin scheme for goods I bought from a VAT-registered business?

Only if that business sold them to you under a margin scheme, so no VAT was shown on the invoice. If VAT was charged and you could reclaim it, the margin scheme does not apply.