VAT - 03.10.2023

When should you use a VAT margin scheme?

What’s a margin scheme?

You might have heard of so-called VAT margins schemes that can be used by businesses if they frequently trade in second-hand goods, e.g. antiques, art, cars, boats and even horses. However, you might not be aware that even where you occasionally buy or sell second-hand goods you too could use a margin scheme.

How margin schemes work

As the name suggests, margin schemes apply VAT on the difference between the price you pay for items and the amount you sell them for, the margin. If you don’t usually trade in second-hand goods, the margin scheme will typically be relevant when you buy used machinery, vans, cars, office equipment and furnishings and then sell them.

Tip. The general margin scheme doesn’t apply to items you buy new, e.g. office furniture, and sell after it’s been used in your business. It only only applies to goods that are bought and sold in second-hand condition.

Which purchases qualify?

Usually, purchases to which you can apply 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. Where you intend to use the margin scheme you must reclaim VAT on the item you purchase.

Can the margin scheme save VAT?

If you buy a second-hand item from another VAT- registered business and they don’t issue you with a VAT receipt or invoice, it’s probably because they’ve used a margin scheme. Check with the seller and if that’s the case there’s a VAT-saving trick you can use.

Tip. Ask the seller to change the sale so that it’s outside the margin scheme. They shouldn’t object as it won’t affect them adversely and usually gives them a cash-flow advantage. From your point of view, while it initially increases the total price, after you’ve reclaimed the VAT the cost will be less.

Example. A dealer buys a second-hand truck for £15,000. He marks it up by £3,000 and offers it to you for £18,600 (that’s £15,000 + (£3,000 + 20% VAT). If you buy it at that price you won’t be entitled to reclaim any VAT so the net cost to you is £18,600. Instead, if you ask him to sell the truck to you outside the margin scheme he’ll add VAT to the full price, making its cost £21,600. The good news is that you can reclaim the £3,600 charged by the dealer making the net cost £18,000 instead of £18,600. You’ve saved £600.

Time to sell

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.