VAT margin schemes tax the difference between what you paid for an item and what you sold it for, rather than the full selling price. You pay VAT at 16.67% (one-sixth) on the difference.
You can choose to use a margin scheme when you sell:
- Second-hand goods
- Works of art
- Collectors’ items
You can’t use a margin scheme for:
- Any item you bought for which you were charged VAT
- Precious metals
- Investment gold
- Precious stones
You can start using a margin scheme VAT at any time by keeping the correct records and then reporting it on your VAT return. You don’t have to register specifically for the scheme or you do not need to inform HMRC unless questioned.
Margin schemes and standard VAT
If some of the items you buy and sell aren’t eligible for a margin scheme, you pay and charge VAT for those items in the normal way.
You can’t include any of the following in your calculations when using a margin scheme:
- business overheads
- parts or accessories
Instead, reclaim these on your VAT return in the normal way.
ᴥ How do I calculate the margin?
Under the Margin Scheme, you only have to account for VAT when you sell goods for more than you paid for it (you do not account for negative margins).
To work out the VAT due on an individual sale, follow the steps in the example below:
|(a) Purchase price||£1500|
|(b) Selling price||£2000|
|(c) Gross Margin (b – a)||£500|
|(d) VAT payable (c x 1/6)||£83.33|
The VAT fraction allows you to calculate the amount of VAT included in a given sum of money.
A standard rate of VAT of 20% gives a ‘VAT fraction’ of 1/6. When you have worked out your gross margin, multiply the figure by 1, then divide by 6.
ᴥ What are the rules for stock books?
You must keep your stock book up to date and it must include all of the information in the table below. This applies to each vehicle you purchase for resale under the Margin Scheme. You may, if you wish, include further information for your own contractor accounting purposes. For example recording vehicle;
|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|
|Vehicle registration number|
|Description of the vehicle (for example, make and model)|
|Margin on sale (sales price less purchase price)|
|VAT due (margin x VAT fraction – 1/6)|
You must include your Margin Scheme calculations under the appropriate headings in your stock book. If your purchase price is higher than, or the same as, your selling price, then no VAT will be due. In these circumstances, you should show the VAT due to ‘Nil’ in your stock book.
You must not offset any VAT on goods which are sold at a loss against VAT on vehicles which you have sold at a profit.
ᴥ Filling in your VAT return
You will need to fill in a VAT return at the end of each tax period. If you don’t know how to file VAT return, then here are the special rules you must follow for any vehicles which you have bought or sold under the Margin Scheme during the tax period:
- box 1 Include the output tax due on all eligible vehicles sold in the period covered by the return
- box 6 Include the full selling price of all eligible vehicles sold in the period, less any VAT due on the margin
- box 7 Include the full purchase price of eligible vehicles bought in the period
There is no requirement to include Margin Scheme purchases or sales in boxes 8 and 9 of your VAT return.
ᴥ Keeping records
You must keep the usual VAT records when you use a margin scheme.
You must also keep:
- ● a stock book that tracks each item sold under the margin scheme individually
- ● copies of purchase and sales invoices for all items
You must keep VAT records for 6 years. You have to keep records until you sell the item for any stock you bought more than 6 years ago that you plan to sell under the margin scheme.
The above information should only be used as a reference, for detailed information please contact us.