What is the VAT Margin Scheme?

Normally, VAT is charged on the full selling price of an item.

With second hand goods, this can lead to double taxation, because VAT was usually paid when the item was first sold as new.

The VAT Margin Scheme avoids this by allowing you to charge VAT only on the difference between what you paid for an item and what you sell it for. In other words, VAT applies to your profit margin, not the full sale price.

This scheme applies only where you could not reclaim VAT when you bought the goods.

Practical example

Imagine you buy a second hand designer handbag for £200 from a private seller and resell it for £300.

Under standard VAT rules, you would owe VAT on the full £300. At 20%, that would be £50.

Under the VAT Margin Scheme, you only owe VAT on the £100 profit margin. That is £20.

In this case, the scheme saves you £30 on just one item.

Multiply this across a year of sales and the savings can be significant.

Who can use the scheme?

The VAT Margin Scheme is open to VAT registered businesses that sell:

• Second hand goods
• Works of art
• Antiques
• Collectors’ items
• Used vehicles

It is particularly useful for online resellers, boutique shops and traders who mainly deal in used goods. However, not all second hand goods qualify.

You can normally only use the scheme where you bought the goods from:

• A private individual
• A business that is not VAT registered
• A seller who also used the margin scheme

You cannot use the scheme if you bought the goods with a normal VAT invoice showing VAT separately, as you could have reclaimed that VAT.

If you reclaim VAT on purchase, even by mistake, the margin scheme cannot be used on resale.

Buying and selling in the UK and overseas

Goods do not have to be bought and sold entirely within the UK to qualify for the margin scheme. What matters is how the goods were acquired and whether VAT was reclaimable.

Some imported works of art, antiques and collectors’ items may still qualify, but special HMRC rules apply to import VAT and record keeping.

Using an intermediary to import goods does not usually make them eligible for the VAT Margin Scheme. If the goods are imported into the UK on your behalf, and import VAT is chargeable or reclaimable at any stage, the scheme cannot be used.

This applies even if an agent or supplier pays the import charges and recharges you later. Only in rare cases where an intermediary genuinely imports and owns the goods in their own right, and no VAT is reclaimable, could the margin scheme potentially apply.

If you buy goods from overseas, you should check the margin scheme conditions carefully before purchasing said goods.

Many margin scheme errors arise from overseas purchases, so professional advice is strongly recommended in these cases.

What if you sell both new and second hand goods?

Many resellers mix brand new and second hand stock. You can still use the VAT Margin Scheme, but you must clearly separate the two in your records.

New goods are subject to normal VAT rules. Second hand goods may be sold under the margin scheme if they meet the conditions.

Good record keeping is essential.

You must keep evidence of:

• Who you bought each item from
• The purchase price
• The selling price
• Whether VAT was reclaimable

These records support your margin calculations and protect you in the event of an HMRC enquiry. HMRC expects item by item tracking for margin scheme stock, not just totals.

Invoicing and advertising under the margin scheme

When you sell goods under the VAT Margin Scheme, you must not show VAT separately on your invoice.

Your invoice should show the total selling price only.

You may include wording such as “VAT Margin Scheme – Second Hand Goods” to make the VAT treatment clear. Showing VAT separately on a margin scheme invoice can invalidate the scheme and create unexpected VAT liabilities.

There is no legal requirement to advertise goods as “not subject to VAT” or “no VAT”.

However, it is good commercial practice to make the VAT position clear to customers, especially business buyers who may wish to reclaim VAT.

How to apply the scheme on your VAT return

You do not need special approval from HMRC to use the scheme, but you must already be VAT registered. On your VAT return:

• Work out the total profit margin on all goods sold under the scheme in the period
• Apply the VAT fraction (currently 1/6 for the 20% rate) to that margin
• Report this figure in Box 1 (output VAT)
• Report total margin scheme sales in Box 6

You do not include the full selling price in Box 6, only the margin scheme turnover.

You cannot reclaim input VAT on margin scheme purchases, even if VAT was included in the price you paid. Instead, you only pay VAT on the margin when you resell.

Most accounting software does not automatically calculate margin scheme VAT, so manual adjustments are often required.

Why the scheme matters for resellers

The scheme helps level the playing field for small businesses that buy and sell second hand items. Without it, VAT would be charged multiple times on the same goods, reducing profit margins and increasing prices for customers.

For online sellers competing in busy marketplaces, the savings can mean the difference between growth and stagnation.

Lower VAT bills allow you to stay competitive or reinvest in more stock.

Final thoughts

If you buy and resell second hand goods, the VAT Margin Scheme is well worth considering. It can reduce your VAT bill, protect your margins and improve your pricing strategy.

The key is buying eligible goods, keeping strong records and separating margin scheme sales from normal VAT sales. With the right systems in place, the scheme is straightforward to operate and can deliver real financial benefits.

If you want advice tailored to your business, get in touch and we can guide you through using the VAT Margin Scheme correctly and confidently.