VAT margin scheme 2023

When you start a business in the UK, you must be very cautious about choosing a suitable accounting scheme. Generally, all the VAT registered companies pay standard tax on their purchases. However, the VAT margin scheme offers one of the most appealing incentives for small enterprises. HMRC introduces this scheme for those people who are unable to reclaim VAT.

What is the VAT margin scheme?

HMRC introduced the VAT margin scheme, which enables a business to pay a reduced rate of 16.67% as opposed to the standard rate of 20% on the sale of goods. It is favorable for second-hand products. Under this scheme, you only pay tax on the difference between the price you pay when you acquire and sell. It means that you are eligible to pay VAT on the profit.

For instance, you purchase a product at £100 and trade it at 150 euros after spending £20 for repair. Then vat will be applied to the profit of £50, which is the difference between the purchase and selling price.

What are the eligible products under the margin scheme?

Regarding the items that are eligible for the margin scheme, it is relatively stringent. Therefore, particular products come under this scheme.

The businesses are entitled to this scheme that are selling the following products; 

• The previously owned products
• The artwork
• The antiquated
• The collector’s item

However, it does not apply to valuable metals, investment gold, and precious stones.

Conditions for joining the VAT margin scheme

The following are the conditions you must meet while using the scheme. 

• Your business must sell eligible goods.
• You must have bought the item for resale when you could not collect VAT. For instance, you have purchased an item from a seller who was not VAT registered.
• You compute it in compliance with the rules of the margin scheme.

Your business must fulfill the mentioned criteria to become part of the scheme. You have to pay VAT on the standard rate otherwise.

How to calculate VAT margin scheme

Under this scheme, permissible products are sold at a reduced rate of 16.67% instead of the standard VAT of 20%. There is a straightforward method to calculate VAT. All you do is compute the difference between the purchased and resale price of the product. Then apply the applicable vat rate on the profit generated. Therefore, the seller does not pay tax on the product’s total price.

Example:

You purchased a collector’s item for £600 and resale it at £800. The VAT of 16.67% will apply to the profit of 200 euros.

                            £200 *16.67% = £33.34

Hence, you have to pay 33.34 euros to HMRC.

Invoices For The scheme

Margin scheme invoices differ significantly from standard VAT invoices. However, it would help if you had legitimate invoices for the products’ purchase and resale. You are required to keep both invoices in compliance with the schemes’ rules.

The invoice for the margin scheme generally has the following details;

• Date 
• Name and address of your business
• Vat registration number of your business
• Name and address of the customer
• Invoice number
• Description of the product
• Stock book number of the product 
• The total price of the product 
• It should be mentioned that the product is sold using the margin scheme

FAQs

Q.1 How VAT margin scheme is different from the standard one?

In standard VAT, you pay 20% tax to HMRC on the purchase of goods; whereas using the margin scheme, you pay a reduced rate of 16.67% which is the difference between the purchased and resale price of the product. Moreover, the VAT margin scheme applies to second-hand products to reduce the possibility of double taxation.

Q.2  What is the margin scheme for vehicles?

The same principle of reduced VAT is applied to the cars considering the following conditions set by HMRC;

• Firstly, the car must have been used previously but is suitable for driving.
• Secondly, It must not be imported from countries outside the EU.
• Lastly, it must be purchased from a non-registered individual or someone registered but cannot reclaim it.

Q3. Is VAT refundable under the margin scheme?

Your business cannot reclaim VAT on purchases using the margin scheme. HMRC has already provided a VAT-reduced rate on specific products. Therefore, buyers cannot reclaim due to less VAT. However, employing the margin scheme when you and your customers are VAT registered is entirely up to you. In that situation, it might not be favorable for your business. This scheme aims to reduce the possibility of double taxation while selling previously owned goods.

Q4. Does vat margin scheme applicable to import goods?

This is applicable when;

•  When eligible products are imported to Great Britain outside the UK.
• They are importing products like antiques and collector’s items from outside the UK into Northern Ireland.
• Selling second-hand vehicles in Northern Ireland that were bought in Great Britain.

Conclusion

To sum up, the VAT margin scheme was introduced by HMRC, which is intended to help businesses sell second-hand products. It thereby reduces the burden of double taxation for the seller. It offers the most appealing incentive for small enterprises. They pay significantly less VAT of 16.67% to HMRC, reducing their tax burden. However, besides enjoying the benefits, it is unsuitable when you and your customer both are VAT registered. In that case, standard VAT will be applied.

Also Read

VAT retail schemes

Flat Rate Scheme

VAT Calculator UK

Register for VAT: How to Guide