VAT Marginal Scheme

In the UK, you must register your business for VAT with HMRC if its VAT taxable turnover (everything you sell that is not exempt from VAT) is more than £85,000.

There are advantages to registering for VAT, such as being able to reclaim VAT paid for business purposes as well as looking more professional. But, of course, it also comes with its drawbacks, such as having to charge more as you now have to add VAT to your sales prices.

There are multiple VAT schemes to choose from with the most well-known being the standard scheme, others include the flat rate scheme and annual accounting scheme, amongst others. Today, we are going to look at the VAT marginal scheme.

The VAT margin scheme was designed to be used by VAT registered businesses that buy and sell second hand goods, therefore:

You can opt-in to the margin scheme if you trade in the following goods:

- Second-hand items (Special rules apply for motor vehicles)

- Works of art (pictures, paintings, drawings)

- Antiques and antiquities (item, other than a work of art or collector’s item, which is over 100 years old)

- Collector’s items

You will not be able to opt-in to the margin scheme, if you trade in the following goods:

- An item which you originally paid VAT upon purchase

- Precious metals

- Investment gold

- Precious stones

The VAT Margin scheme taxes the difference between what you pay for an item and what you sell it for, rather than the full selling price.

In the following examples, you as a VAT registered business, were to purchase eligible goods from a non VAT registered private individual for £1,500.00 and then went on to sell it for £2,000.00 to another non VAT registered private individual.

You would have no VAT to reclaim on the purchase. However on the sale, if you were on the standard scheme, the VAT due would be £333.33, leaving you with £166,66 in profit.

Whereas on the margin scheme, you will pay VAT on the difference as mentioned above at 16.67% (1/6).

Purchase price: £1,500.00

Selling price: £2,000.00

Gross margin: £500.00

VAT payable: £83.33

Profit: £416.67

Alongside the general records that must be kept if you are VAT registered (follow the link for further reading, https://www.gov.uk/guidance/record-keeping-for-vat-notice-70021), if you are using the margin scheme, there are some additional record keeping rules which apply to your stock books and invoices. Please see the table below for details.

Purchase details Sales details

Stock number in numerical sequence

Date of purchase Date of sale

Purchase invoice number Sales invoice number

Purchase price Selling price, or method of disposal

Name of seller Name of buyer

Description of the item

Margin on sale (sales price less purchase price)

VAT due

You must keep all your business records for VAT purposes for at least 6 years.

You do not need to register with HMRC to use the margin scheme, as long as your transactions match the criteria mentioned above, then you can simply apply the margin scheme to your sales and report them through your VAT returns.

Please bear in mind that additional rules may apply when selling goods outside of the United Kingdom.

If you would like further information on the scheme then please follow the link below or give us a call on 01273 441 187.

https://www.gov.uk/guidance/the-margin-and-global-accounting-scheme-vat-notice-718#section2

If you are a Quickbooks user, and you would like guidance on how to apply the marginal scheme on the software, then please follow the link below for a quick Youtube tutorial.

Learn how to create a VAT margin scheme in QuickBooks Online.

If you want to contribute to the Chamber blog, contact us on hannah@brightonchamber.co.uk