V7.244 Margin schemes for second-hand goods
The basic rule of VAT is that output tax is due on the full value of goods sold by a business (unless the goods are specifically zero-rated, exempt or subject to the reduced rate of VAT).
However, there are special schemes in place that reduce the output tax liability on goods sold by certain businesses – through what is known as a second-hand margin scheme.
The following traders can apply a margin scheme:
• motor vehicle dealers
• businesses trading in works of art, antiques or collectors' items
• second-hand goods dealers
• traders who obtain goods in their own name, but are acting as an agent, in relation to a supply
How a margin scheme works
Under a margin scheme, VAT is accounted for on the difference between the purchase price and the selling price of eligible goods in each VAT period. In effect, output tax is declared on the 'profit margin' – if no profit is made, then no VAT is payable. The seller's margin is not revealed to the buyer.
The VAT registration test for a trader dealing in margin goods is still based on the gross value of his sales, and the record keeping requirements for a business using a margin scheme are very strict. If these requirements cannot be met, then a business could be ineligible to use a second-hand scheme and would then have to account for output tax on the full value of a sale in the normal way.
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