How the VAT Margin Scheme Works for Second-Hand Goods

A trader who buys used goods from private sellers faces a VAT problem. There is no VAT on the purchase, because the private seller did not charge any, so there is nothing to reclaim, yet under normal rules the trader would have to charge VAT on the full resale price. The VAT margin scheme solves this by charging VAT only on the margin, the difference between what the trader paid and what they sold for. It is one of the optional schemes that sit alongside the others in our guide to VAT accounting schemes.

VAT on the margin, not the price

Under the scheme, VAT is due only on the margin. The VAT element is one sixth of the margin, equivalent to 16.67 percent, reflecting that the margin is treated as VAT-inclusive. If there is no margin, because the item sold for the same as or less than it cost, there is no VAT to pay on that sale, and a loss on one item cannot be used to reduce the VAT on another.

Two restrictions come with using the scheme. You cannot reclaim any VAT on buying the goods, which is rarely an issue because they were typically bought VAT-free, and you cannot show VAT separately on your sales invoice, so the buyer cannot reclaim VAT on the purchase either. For sales to private consumers that is irrelevant; for sales to VAT-registered buyers it can matter, and standard VAT may suit better.

A worked example

A dealer buys a used item from a private seller for £1,000 and sells it for £1,600. The margin is £600. VAT due is one sixth of £600, which is £100. The dealer keeps £500 of the margin after VAT. Under standard VAT the dealer would have had to account for £266.67 of VAT on the full £1,600 with nothing to reclaim on the purchase, so the margin scheme leaves the dealer materially better off on goods bought VAT-free.

Which goods qualify

The scheme is for second-hand goods, works of art, antiques and collectors' items. Used cars are one of the most common uses, but the scheme covers a wide range of resold goods. Some things are specifically excluded:

• Any item you bought and reclaimed VAT on cannot go through the margin scheme.
• Investment gold, and precious metals and precious stones, are excluded.
• Goods bought on a normal VAT invoice from another VAT-registered business, where VAT was charged, fall outside the scheme.

HMRC sets out the qualifying goods and the rules in its guidance on VAT margin schemes.

The stock book is not optional

The record-keeping is the part HMRC enforces hardest, because the whole scheme rests on it. You must keep a stock book that records every item bought and sold under the scheme, with enough detail to identify each one: the purchase date and price, the sale date and price, and the margin and VAT on each item. You also need a purchase invoice for each item, even where the seller was a private individual. If the records do not support the margin claimed, HMRC can refuse the scheme and charge VAT on the full selling price, so weak records turn a saving into a liability.

The global accounting variant

For dealers in high volumes of low-value items, recording each one individually is impractical. The global accounting scheme is a simplified version that taxes the overall margin across all eligible purchases and sales in a period, rather than item by item. It suits bulk traders in small goods, though it has its own exclusions and rules, and the choice between item-level and global accounting is worth setting up correctly from the start.

Common questions about the VAT margin scheme

Do I pay VAT if I sell an item at a loss?

No. VAT under the scheme is due only on a positive margin, so an item sold for the same as or less than it cost carries no VAT. You cannot, though, offset that loss against the margin on other items.

Can my VAT-registered customer reclaim the VAT?

No. The scheme does not allow VAT to be shown separately on the sales invoice, so a VAT-registered buyer has no VAT to reclaim. Where you sell mainly to VAT-registered businesses, standard VAT may be the better choice.

What happens if my records are incomplete?

HMRC can refuse the margin scheme on any item the records do not properly support and charge VAT on the full selling price instead. The stock book and purchase invoices are what make the scheme valid, so the saving depends entirely on keeping them.

The margin scheme is a real saving for dealers buying goods VAT-free, but it lives on its paperwork. A VAT accountant can confirm your goods qualify, set up a compliant stock book, and decide whether item-level or global accounting fits the way you buy and sell.