If your business sells second-hand goods either online or via a physical shop, understanding the VAT margin scheme can reduce your tax burden. In addition, it can simplify accounting for VAT. Although, it comes with a detailed set of rules that every business must adhere to. In this post, we discuss how the scheme works, plus how to calculate the VAT due, We'll also cover the recent changes that affect businesses in Northern Ireland.
What type of goods qualify?
Overview
The scheme applies to specific categories of goods. These are usually goods that are Second-hand. Additionally, they are pre-owned items suitable for further use, either in their current condition or after repair.
Importantly, where new stock is purchased from a non-VAT registered supplier the sales will not qualify for inclusion in the scheme. Special rules exist for second-hand vehicles, horses and ponies, houseboats, caravans, and pawned items.
Works of art
Only those hand-crafted items such as paintings, drawings, sculptures, tapestries, and similar pieces qualify. Unfortunately, mechanically produced items, like technical drawings or maps, are usually non-qualifying..
Collectibles
in this case the items must be of genuine interest. For example, archaeological finds, historic artefacts, philatelic pieces, or botanical collections. However, not everything someone considers to be a collectible will qualify. Furthermore, stamps have their own designated category.
Antiques
To be classed as an antique under the margin scheme, the item must be at least 100 years old though not regarded as a work of art or collector’s item. Although some items don't qualify, Specifically precious metals, investment gold (including coins), and precious stones. The most obvious examples being diamonds, rubies, sapphires, and emeralds.
When Can You Use the VAT Margin Scheme?
Where VAT has been charged on the purchase, these goods remain non-qualifying. This rule applies regardless of whether you chose not to claim the VAT.
Generally speaking, goods are eligible for the scheme when you purchase them from a private individual, a non VAT registered business, or a VAT-registered business selling under the margin scheme.
However, there are exceptions for imported works of art, antiques, and collectors’ items. Additionally, where works of art are acquired directly from their creators or heirs they are not eligible for the scheme.
How do you calculate the margin?
Once you know what items to include the calculation is straightforward once you know what items to include.
The selling price of the item includes all income received directly linked to the sale. Therefore tis could include commission, packaging, transport, and insurance costs. Although optional extras and third-party insurance are not included.
The purchase price of the item is everything paid for the goods, which could include commission, packaging, transport, and insurance. However, repair or refurbishment costs do not form part of the purchase price, though VAT on repair parts may be claimed in the usual way.
Then VAT is simply charged on the selling price minus the purchase price - the margin. You do not have to pay VAT on the full sale price..
Invoices and record keeping
Invoices under the margin scheme are different from standard VAT invoices different. The Crucial, difference is that VAT must not appear separately.
Instead, the invoice should include a note stating which margin scheme applies to each sale. For example as “Margin scheme – second-hand goods” or “Margin scheme – works of art.”
Where the goods were bought from a private individual, you'll need to create your own purchase invoice to maintain proper records.
The VAT return entries
When completing your VAT return, special rules apply. You must:
However, you don't need to include margin scheme purchases or sales in Boxes 8 and 9.
Issues with bookkeeping software
Unfortunately the margin scheme is not supported by some bookkeeping software. It is then a case using a workaround. This usually involves creating two invoice lines: one for the purchase price (VAT exempt) and another for the margin price (subject to 20% VAT).
While this technically works, dealers often prefer to hide these details from customers. Therefore it may be a case of creating manual invoices outside of a system's standard template. alternatively the breakdown can be hidden from the customer, whilst recording it internally in two lines.
Northern Ireland and the Margin Scheme
A new scheme effective from 1 May 2023 permits VAT-registered UK businesses to claim VAT refunds when moving second-hand vehicles from Great Britain to Northern Ireland for resale. Whlst those businesses without a UK establishment may still claim, they must apply directly to HMRC. Furthermore in some cases, it may be necessary to appoint a UK-based representative.
From 1 May 2023, dealers can no longer use the VAT margin scheme for vehicles bought in Great Britain and moved to Northern Ireland. As an alternative, they must rely on the export refund scheme, except for those vehicles already in stock before that date and sold by 30 April 2024.
Summary
Understanding the VAT margin scheme is vital if you deal in second-hand goods, works of art, antiques, and collectors’ items. Furthermore, it can make a real difference to your VAT liability. though only if the rules are correctly. You should maintain accurate records, issue VAT compliant invoices, and ensure your VAT return reflects the correct figures.
For more useful information, check out our Ebooks here.
And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.