VAT margin scheme - What is the margin scheme?
The margin scheme is an optional tax scheme in the UK that allows a VAT-registered business to pay tax on the difference between the cost and sale of goods
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Generally associated with the secondhand sale of goods such as antiques and art, the margin scheme aims to allow certain businesses to work with a VAT scheme based on added value to goods, as opposed to the total sale value.
In other words, the VAT amount is only paid on the difference between the price that a business pays for an item and the total amount for which that the same item is later resold.
Who can use the margin scheme
The VAT margin scheme is designed for VAT-registered businesses that work with specific products. These products are typically bought, then might be refurbished or otherwise acquire additional value before being resold.
The margin scheme, however, is only available to businesses that qualify. This means that they must work with goods that are considered eligible, that those goods must be purchased under eligible circumstances, calculations of buying and selling prices must be calculated a particular way, and certain rules must be followed when it comes to stock management.
Businesses that work with the VAT margin scheme typically deal with the following types of products, purchased for resale:
- Secondhand goods: purchased and then refurbished or repaired for the purposes of reselling them (those that do not fall under antiques or works of art).
- Artwork: created by hand, by lithograph, through plates by an individual (not machine), sculptures, tapestries, ceramics, etc. All must be handmade, or if from a mould - considered limited editions.
- Collector’s items: these items usually fall unders collections such as those considered scientific, historical, zoological etc.
- Antiques: antiques are items that do not fall under works of art or collector’s items that are more than 100 years old.
It’s important to note that there are some goods that cannot be included under the VAT margin scheme. These include:
- Purchased items that include VAT
- Precious metals
- Precious gems
- Gold used in investment
There are some exceptions, so if a business deals with any of these items, it’s important that they speak to a specialist to determine whether they qualify under the margin scheme.
How the margin scheme works
A business looking to join the margin scheme will deal with qualifying goods, on which they purchase from a non-VAT registered individual or business and also sell to a non-VAT registered individual or business.
The scheme allows the business to pay tax on only the difference between the purchase and sale price, generally at a flat rate - the margin x ⅙.
It is not necessary for businesses to register under the margin scheme with HMRC. As long as the VAT-registered business meets the criteria for it and applies the calculations correctly, it can proceed with using the margin scheme.
Example of the margin scheme
Ray runs an antiques business. He purchases a 150 year old wardrobe from an individual selling it privately. He pays £875 for the item. He puts a little bit of work into polishing it and fixing a few small cosmetic issues and sells it for £1,500.
Under the margin scheme, tax would be paid on the £625 difference between Ray’s purchase price and the price the wardrobe was sold for. So the VAT would be 625 x ⅙ = £104.17.
Using the margin scheme
Online resale businesses are becoming one of the main users of the margin scheme. This includes Etsy, Amazon, eBay, and businesses based on resale such as vintage clothing or even electronic devices.
Under the margin scheme, the business would not include VAT on any invoices although they are VAT-registered. This is because VAT is not charged on the sale price to the non-VAT registered buyer.