Normally you charge VAT on your sales, and reclaim VAT on your purchases. However, if you sell second-hand goods, works of art, antiques or collectibles, there may have been no VAT for you to reclaim when you bought them. You may be able to use a VAT margin scheme. This enables you to account for VAT only on the difference between the price you paid for an item and the price at which you sell it - your margin. You won't pay any VAT if you don't make a profit on a deal. You can still use standard VAT accounting for other sales and purchases such as overheads.
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Using standard VAT accounting, you charge VAT on your selling price and reclaim VAT on the price of your purchases. This means that you only pay VAT on the value you added to the item you sold, that is, the difference between how much you paid for the item and how much you sold it for.
You have to charge VAT when you sell taxable goods. If there was no VAT on your purchase invoice, you will have to pay HMRC the VAT you charged on your selling price, but you won't have any VAT to claim back on your purchase price. Margin schemes can save you money if you sell certain types of goods on which there was no VAT for you to reclaim because they duplicate the effect of standard VAT accounting. In other words, they allow you to pay VAT on the value you added to the goods, rather than on their full selling price.
There are specific rules for defining what the margin is, and there are limits on the types of goods which are eligible for the scheme.
If you use a margin scheme, you can still use standard VAT accounting for other items that you sell. You can also reclaim VAT on business expenses such as overheads.
You can use a margin scheme if you trade in eligible goods that you've bought under eligible circumstances, for example from businesses or individuals who are not registered for VAT, or from businesses selling under the scheme.
'Eligible goods' include the following:
In addition to the restrictions above, you cannot use a margin scheme:
Compared to standard VAT accounting:
When you use a margin scheme, the difference between the purchase and sale price - the gross margin - is treated as VAT-inclusive. To work out the VAT due on an item, you find this margin and multiply it by the VAT fraction.
For example, if you buy a standard-rated item for £1500 and sell it for £2000, the gross margin is £500. You then multiply £500 by the VAT fraction to calculate. This is your VAT due to HMRC.
There are particular rules on how to determine your purchase price and your selling price for the purpose of calculating VAT using a margin scheme. In general, the rules for both sides of the transaction mirror each other.
The purchase price is what you paid for an item. It does not include the costs of making it ready for selling. For instance, you cannot include the cost of any repairs or refurbishment. However, you can reclaim any VAT that you paid on these using standard VAT accounting.
The selling price includes all your proceeds from selling an item, whether from a buyer or via a third party, including incidental expenses directly linked to the sale. If you take something in part exchange, you must include the value of that item in the selling price. The selling price does not include disbursements or optional extras that are charged to the buyer, for example the services of a carrier to transport an antique piece of furniture to the buyer. You should account for these items using standard VAT accounting if appropriate.
If you use a margin scheme, you must keep all required VAT records and accounts, plus:
You don't need to fill in an application form to join a scheme and you can start using it at any time.
In addition to the standard VAT Margin Scheme, there is the VAT Auctioneers Scheme and VAT Global Accounting.
If you are an auctioneer acting in your own name and selling eligible goods, you can either use the agents' rules or the auctioneers' scheme - a variation on the margin scheme.
This is a simplified version of the margin scheme. It is useful if you deal in high volume, low price items that make it difficult for you to keep detailed records.
There are special requirements if you want to use a margin scheme for some types of items, or if you buy and sell them in a particular way.
Whether you are an agent acting in your own name, or selling eligible goods on behalf of others, you can use a margin scheme.
If you are selling horses and ponies under the margin scheme, you may want to use the special three-part forms supplied by the British Equestrian Trade Association to simplify your record-keeping.
You can only use the margin scheme for a vehicle that has at some point actually been driven on the road for business or pleasure - HM Revenue & Customs (HMRC) doesn't consider a vehicle to be second-hand just because it's been registered, has delivery mileage and has been bought and re-sold.
If you are a pawnbroker and sell unredeemed pawns, you can use the margin scheme as long as the original loan was not more than £75, had a six month redemption period, and you have taken title to the goods.
There are specific ways of dealing with shares and other items that you own, buy and sell jointly with others.
Rules for using margin schemes for items bought or sold outside the UK vary according to whether the country is inside or outside the EU, and how items purchased from EU countries were supplied.
You may be able to use a margin scheme with the Annual Accounting Scheme or the Cash Accounting Scheme. You cannot use margin schemes with the Flat Rate Scheme, and they are not generally suitable for use with a retail scheme.
Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT Return at the end of the year when you either make a balancing payment or receive a balancing refund.
Unlike standard VAT accounting where VAT is due when you issue an invoice, using cash accounting you don't have to pay VAT until your customers pay you.
Using the Flat Rate Scheme you simply pay a fixed percentage of your turnover as VAT.
If you are a retailer, there are several schemes where you can simplify your calculation of VAT by not having to account for VAT on each individual sale.
The Tour Operator's Margin Scheme makes VAT accounting easier for tour operators that buy and sell travel, accommodation and certain other services internationally.