The VAT Margin Scheme lets eligible dealers pay VAT on the profit margin made on certain second-hand goods, works of art, antiques and collectors’ items, rather than on the full selling price. It is optional, transaction-specific and depends on how the item was acquired.
How the scheme works
The VAT-inclusive margin is:
Selling price − purchase price = margin.
For a standard-rated margin, VAT is normally one-sixth of the positive margin. If there is no margin, no output VAT is due under the scheme, but a loss on one item usually cannot offset a profit on another unless a permitted global accounting method applies.
Worked example
A dealer buys an eligible used item for £1,200 and sells it for £1,800. The margin is £600. VAT due is £100 (£600 ÷ 6), leaving a net margin before other costs of £500.
VAT is not separately shown on the customer invoice, so the buyer cannot reclaim it as input tax.
Which goods can qualify?
- second-hand goods suitable for further use as they are or after repair;
- works of art;
- antiques;
- collectors’ items;
- specified vehicles under the relevant rules.
Precious metals and stones, investment gold and items bought with recoverable VAT can be excluded or follow special rules.
Eligible ways to acquire an item
The item generally needs to come from a person who did not charge deductible VAT, such as:
- a private individual;
- an exempt business;
- another dealer using a margin scheme;
- a business that could not reclaim input tax on the item;
- certain imports or creator supplies under the art rules.
If a supplier charges ordinary VAT and you reclaim it, you normally sell under standard VAT accounting rather than the Margin Scheme.
Purchase price and selling price
Purchase price is what you pay for the item, including inseparable incidental costs charged by the seller. Your own repair, restoration, transport, auction or overhead costs are not added to the purchase price for the margin calculation, though they may have their own VAT treatment.
Selling price includes everything charged to the customer for the supply, subject to the detailed rules.
Invoices
A valid margin-scheme sales invoice must include the required wording identifying the applicable scheme, for example “Margin scheme — second-hand goods”. It must not separately state VAT. Keep purchase invoices or signed purchase records showing the seller and item details.
Record keeping
- stock book with unique item references;
- purchase date, seller, description and price;
- sale date, customer, selling price and margin;
- purchase and sales invoices;
- calculations and scheme category;
- evidence that the acquisition was eligible;
- records of items moved into or out of the scheme.
HMRC normally requires Margin Scheme records to be kept for six years, subject to special record periods.
Global accounting
Eligible low-value goods can use a period-based global calculation rather than item-by-item margins. Conditions, exclusions and stock adjustments apply. High-value items and specified goods may need individual tracking.
Imports and exports
Import VAT and customs duty can affect eligibility and purchase-price calculations. Exports may be zero-rated where evidence and conditions are met, but the Margin Scheme treatment needs review before invoicing. Northern Ireland movements can involve additional rules.
Second-hand vehicles
Used cars have detailed eligibility, purchase-invoice and stock-book requirements. Demonstrators, qualifying cars, commercial vehicles and cross-border purchases may follow different treatment. Confirm whether VAT was recoverable when the vehicle was acquired.
Can you choose transaction by transaction?
Generally yes, where an item qualifies. You can use normal VAT accounting instead, but the choice affects input VAT, invoicing and customer price. Once an item is sold and invoiced, retrospective changes can be difficult.
Common errors
- using the scheme for goods bought with recoverable VAT;
- including repair costs in the purchase price;
- showing VAT separately on the invoice;
- offsetting losses incorrectly;
- missing seller or stock-book evidence;
- assuming all used goods qualify;
- mixing scheme and normal sales in the VAT return.
VAT return entries
Report the VAT due on the margin as output tax. The VAT-exclusive selling value for return purposes follows HMRC’s scheme instructions, not simply the full proceeds in every box. Reconcile the stock book to the VAT return.
Official guidance
This guide is general information. Vehicle, art, import and auction transactions can need specialist advice.
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