Taking advantage of the general margin scheme

Margin scheme

The rules allow certain types of trader to use VAT margin schemes. Generally these can be used by businesses that frequently trade in second-hand goods such as antiques, art, cars and even horses. If your business is buying and selling these items you’ll know about the trade-specific scheme that applies. However, if you only occasionally buy or sell second-hand goods you too could use a margin scheme.

General second-hand margin scheme

As the name suggests, the scheme focuses VAT treatment on the margin between the price you pay for items and the amount you sell them for. If you don’t usually trade in second-hand goods, the margin scheme is likely to come into play when you buy used machinery, vans, cars, office equipment and furnishings. Plus when you sell them on.

Note. The margin scheme doesn’t apply to items you buy new, say a computer, and sell after being used in your business. It’s only for items that are bought and sold in second-hand condition.

Identifying an eligible purchase

Typically, purchases eligible for the margin scheme are goods bought from:

• a private individual
• a dealer in second-hand items
• another business where it bought the item in a used condition before selling it to you and it applied the margin scheme.

Trap. In each of these situations you are not allowed to reclaim VAT.

VAT-saving tip

If you buy a second-hand item from a dealer or another business and they don’t issue a full VAT receipt, it will be because they’ve used a margin scheme, meaning you can’t reclaim any VAT included in the cost. However, there is something you can do about this.

Tip. Ask the seller if you can purchase the item outside the margin scheme. They shouldn’t object as it won’t affect their profit on the deal. As far as you’re concerned, while this will increase the total price, once you’ve reclaimed the VAT the cost will be lower.

Example. A dealer buys a second-hand truck for £12,000. He marks it up by £2,500 and offers it to you for £15,000 (that’s £12,000 + £2,500 + 20% VAT on his margin). If you buy it at that price you won’t be entitled to reclaim any VAT so the net cost to you is £15,000. However, if you ask him to sell the truck to you outside the margin scheme he’ll have to add VAT to the full price, making its cost £17,400, but you can reclaim £2,900 making the net cost £14,500. You’ve saved £500.

Selling second-hand items

If you sell an item you bought second hand and on which you weren’t entitled to reclaim VAT, you can sell it using the VAT margin scheme. That means if you sell it for less than you paid for it you don’t have to charge VAT. But if you sell it for more than it cost, you must add VAT on the margin only (to see how this is done look at the dealer’s position in the example above) and account for it to HMRC. In both situations you must not issue the buyer with a VAT invoice.