The VAT margin scheme is a useful tax rule that can be applied when reselling secondhand goods, works of art or antiques and collectors’ items. When applying this rule, the tax isn't charged on the entire sale price of an item, but only on the margin you keep - i.e the difference between what you bought the item for and what you sold it for. In essence, this tax benefit supports the recycling of goods and promotes a more sustainable economy by making the trade in used goods more financially attractive.
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The VAT margin scheme can only be applied under specific conditions. In this blogpost we are going to focus on the applicability of the scheme for merchants of secondhand goods. You are responsible to ensure that the conditions and no expemtions apply to your circumstances. We have linked to several articles from HMRC if you want to dive into more detail.
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1. Firstly the goods must be secondhand indeed. The VAT margin scheme can not be applied when reselling new items.
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2. Secondly, when the items were purchased no VAT was charged. So if you are sourcing items from private individuals, this point should not be a problem, as individuals do not charge VAT.

Here is an example of how the VAT Margin scheme works in practice:

Suppose you buy a vintage designer jacket from a private person for £100. Since the seller is a private individual, no VAT is charged on your purchase. Later, you sell the jacket for £300. Under the VAT margin scheme, you only pay VAT on your margin, which in this case is £200 (£300 - £100). These 200£ already include the 20% VAT, which means that you need to pay 33.34£ of tax on this transaction. In case you were wondering why it was not 40£, please read the below section on common mistakes.

Does the VAT margin scheme also apply when selling on consignment / commission?
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‍If the general conditions for the VAT margin scheme are met it can also be applied to resale on consignment which is also sometimes called commission. By the lawmaker this is referred to as "reselling as an agent". When you are a secondhand store or online merchant that receives secondhand goods (for example clothing) from individuals and share the revenue with these individuals once the item was sold, the VAT margin scheme should be applicable to you.
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1. Mistake: Applying Tax on the Full Sale Price
Many resale businesses make the mistake of calculating VAT on the entire gross sale price rather than just on the margin, which is the difference between the purchase and sale prices.
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2. Mistake: Misunderstandings in Calculating VAT
A common misconception is to treat VAT as a deduction from the gross sales price, similar to income tax. For example, if the gross revenue is £100, the VAT is not £20 (£100 x 0.20). VAT is already included in the gross sales price and is not an additional charge.

To determine the tax correctly, you can either multiply the margin by one sixth i.e 16.67% like this: 100£ x 0.1667 = 16.67£
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Alternatively you determine the "original price" (i.e price without tax) first like this: 100£ /1.20 = 83.33£
And then subtract it from the original margin like this: 100£ - 83.33£ = 16.67£
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As you see in both ways of calculating the  £16.67 of VAT is already included in the gross price of £100.
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3. Mistake: Incorrectly Accounting for Discounts
When an item is sold at a discounted rate, the tax should be calculated on the discounted profit margin, not on the original difference.

4. Mistake: Lack of Proper Documentation of Purchase and Sale Prices
Complete documentation is essential for the correct application of VAT margin scheme. Without accurate records, the actual profit margin cannot be correctly calculated, leading to incorrect tax declarations. A tool like Circle Hand can help you easily with this documentation.

5. Mistake: Confusing secondhand and new items in Mixed Inventories
In stores that sell both new and used goods, it is crucial to distinguish which items are eligible for the VAT margin scheme. Treating all items the same is not allowed.
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Getting your pricing right with the VAT margin scheme in mind is crucial. Circle-Hand is an inventory and consignor management system specifically built for secondhand merchants. Among many other time-saving features it also gives you a clear overview of your taxes and helps you to price your items optimally. For more information, visit www.circle-hand.com