VAT margin scheme - What is the VAT margin scheme?
VAT margin schemes involve paying a reduced VAT rate on second-hand items and only paying VAT on the difference between the buying and the selling price.
If your business uses the VAT margin scheme, you will still need to submit a VAT report to HMRC. Find out how to create a VAT report using invoicing software.
The margin scheme permits a company to pay 16.67% VAT rather than the standard 20% for eligible purchases. The 16.67% rate is only applied to the difference between what you paid for the product, and the amount you sold it for.
Eligible products and conditions under the VAT margin scheme
The scheme is quite strict in regards to which products are eligible for the reduced rate. There are also several conditions that must apply to the sale.
Businesses are eligible to use the scheme if they are selling the following products:
- Second-hand products
- Collector’s products
Please note that this scheme does not apply to second-hand cars. This involves different criteria which I will outline below.
If your business decides to use the scheme, there are several conditions that you must meet:
- The sale must include eligible products.
- You must have purchased the product under eligible circumstances. You must have purchased the product for resale where you could not reclaim VAT (i.e. you purchased from a non VAT registered individual or entity, or purchased under the VAT margin scheme).
- You calculate the VAT margin (i.e. the difference between the purchase price and the selling price) according to the rules of the VAT margin scheme.
- You have all of the required documents and information about the purchase and the sale.
If the sale does not meet all of the criteria, then you must account for VAT in the standard way.
How to register for the VAT margin scheme
Eligible businesses do not need to register for the scheme. As long as your company is registered for VAT, you can apply the scheme to sales that meet the requirements.
If you are not VAT-registered, and your turnover is below the £85,000 threshold, you cannot use the scheme unless you voluntarily register for VAT, or reach the threshold.
Can you reclaim VAT on the VAT margin scheme
Buyers are not able to reclaim VAT on purchases that used the VAT margin scheme. Because you are paying less VAT, it is not possible.
If both you and the customer are VAT-registered, it is up to you to decide if it would be worth it to use the margin scheme or not. It is completely optional and in certain circumstances, using the standard VAT approach may be beneficial.
How to fill out your VAT return under the VAT margin scheme
When it comes time to fill out your VAT return, you will need to record any products you purchased or sold using the VAT margin scheme. You will need to keep sufficient proof of the purchase and sale of the product in the form of invoices and receipts.
On the VAT return, you will fill out the following information:
- Box 1: Any output VAT on eligible products sold during the period
- Box 6: The full sales price of eligible products sold in the period - excluding the VAT from the margin scheme
- Box 7: The full purchase price of eligible products purchased in this period
VAT margin scheme example
As an example, let’s say you run an antique store. You purchase an antique clock for £300 from an individual (not VAT registered). You pay a clockmaker £50 to repair a part. You later sell the clock to a customer for £500.
The VAT margin is the difference between the purchase price and the resale price. The amount paid to restore or repair the product is not included in the margin. Therefore, the VAT margin for this sale is £200 (£500 - £300).
From there, you can calculate 16.67% of £200 which will be the amount of VAT paid on this sale:
£200 x 16.67% = 33.34
In this example, under the VAT margin scheme, the VAT payable is £33.34, rather than the standard 20% rate of the entire purchase price (£100).
VAT margin scheme for cars
It is possible to use the VAT margin scheme for second-hand cars, however, there are different requirements for these sales than the ones listed above.
The same overall principle applies to cars, where you will have to calculate the margin, and then pay 16.67% VAT on the margin amount. However, there are very strict rules surrounding the car sale:
- The car must be second-hand - must have been driven on the road, and is suitable for use
- Imported vehicles from outside the EU do not qualify
- The purchase of the vehicle must have been from a non VAT registered individual/entity, or a VAT-registered business who cannot reclaim VAT on the sale due to using the margin scheme
- The purchase and sale invoice cannot show the VAT separately
If the sale does not meet these conditions, then you will need to account for the standard VAT.
VAT margin scheme invoice
Margin scheme invoices are quite different than a standard VAT invoice. It is important that you have a proper invoice for the purchase and sale of the product, or it may not qualify for the VAT margin scheme.
Under the scheme rules, you must keep both the invoice you received when purchasing the item as well as the invoice you gave to your customer when selling the item.
A VAT margin scheme invoice must include the following:
- The date
- Your (business) name and address
- Your VAT registration number
- The customer’s name and address
- The invoice number
- The product description
- The product’s stock book number*
- The total price - Do not show VAT separately*
- A note mentioning that the sale is using the margin scheme*
The list items with a * are not generally shown on a VAT invoice.
You can create the invoice using invoicing software or by hand, but you must ensure that the required information is shown or the sale may be considered ineligible under the scheme. You should keep these records for at least 7 years.