If you buy and sell second-hand stock in the UK, you’ll know the pricing tug-of-war: customers want a bargain, your costs keep creeping up, and VAT can feel like it’s taking a bite out of money you haven’t really “made”. That’s especially true for resellers, antique dealers, used car dealers, and eCommerce sellers who source from private individuals, house clearances, auctions, and Facebook Marketplace.
Here’s the good news: you’re not alone — and there is a legitimate HMRC framework designed for exactly this situation. The VAT margin scheme explained properly can help you price more competitively and protect cashflow, without cutting corners. But it’s also a scheme that punishes sloppy paperwork, wrong invoices, and “nearly right” calculations.
Let’s make it clear, practical, and UK-accurate.
Direct answer
The VAT margin scheme is a UK VAT method where you pay VAT only on your profit margin (selling price minus purchase price), not on the full selling price.
It’s mainly for VAT-registered businesses selling eligible second-hand goods, antiques, works of art, or collectors’ items where input VAT wasn’t reclaimable on purchase.
It matters because it can reduce VAT due, improve cashflow, and help you keep prices competitive — but only if you follow strict record-keeping and invoicing rules.
Key takeaways
- You calculate VAT on the margin (sale price − purchase price), not the total sale.
- VAT is usually worked out using the VAT fraction: one-sixth (16.67%) of the margin (at the standard rate).
- You generally cannot use the scheme if you bought the item with reclaimable VAT (e.g., a normal VAT invoice where input tax could be claimed).
- You must not show VAT separately on your sales invoice under the scheme.
- Losses on one item do not reduce VAT due on profitable items (each item stands on its own, unless you’re using a specific “global” variation).
- HMRC expects stock book-style records and supporting purchase/sale evidence.
- The scheme is often ideal for second-hand dealers, antique traders, used car pitches, and refurb resellers — but not always best for B2B customers who want a VAT invoice.
- If your sourcing is mixed (trade + private + imports), get the setup right early to avoid painful corrections later.
The VAT margin scheme explained
What the VAT margin scheme is
A VAT margin scheme is a set of UK VAT rules that lets a VAT-registered business account for VAT only on the value it adds to certain goods — in other words, the margin between what you paid and what you sold for.
Why HMRC allows it is simple: second-hand goods have often already had VAT “in the system” when they were first sold new. If a dealer had to charge VAT on the full resale price again (while often being unable to reclaim VAT on purchase), it creates double taxation and makes legitimate second-hand trading uncompetitive.
Under the margin scheme:
- You charge the customer a single “VAT-inclusive” selling price.
- You calculate the margin (profit margin, not accounting profit).
- You pay HMRC VAT on that margin using the VAT fraction (typically one-sixth).
This is not the same as “no VAT”. VAT is still due — it’s just calculated differently.
Who can use it
Eligibility checklist
You’re usually eligible if all of the following apply:
- You are VAT registered in the UK.
- You buy and sell eligible goods (second-hand goods, works of art, antiques, collectors’ items).
- You acquired the item in a way that means you could not reclaim input VAT on the purchase (for example, buying from a private individual, or from another dealer who sold it to you under a margin scheme).
- You keep the required records (including stock records that link each purchase to each sale).
- You follow the invoicing rules (no VAT shown separately, correct margin scheme wording).
Who can’t use it
You normally cannot use a margin scheme if:
- You bought the item and were charged VAT you could reclaim (a standard VAT invoice from a VAT-registered supplier, where the VAT is recoverable as input tax).
- The item is in an excluded category (notable examples include precious metals, investment gold, and precious stones).
- You don’t have adequate purchase evidence / stock records.
- You want to use it “sometimes” for the same item depending on outcome. The treatment must be correct based on how the item was acquired and how you’re selling it.
Professional reassurance: most margin scheme problems I see aren’t “tax fraud” — they’re genuine businesses who didn’t realise one missing invoice line or one wrong purchase type breaks the chain. Fixable, but better avoided.
What goods qualify
Below is a practical guide. Always treat eligibility as both: (1) the type of goods and (2) the way you acquired them.
| Category | Examples (UK trading reality) | Notes (what matters) |
| Second-hand goods | Used phones, refurbished laptops, pre-owned clothing, second-hand furniture, used tools, used car parts | Must be capable of further use “as is” or after repair/refurb. Purchase route must be eligible (e.g., private sale). |
| Antiques | Items over 100 years old: antique furniture, clocks, ceramics, silverware (subject to exclusions) | Age matters; keep evidence where possible (auction listing, appraisal notes). Exclusions can apply (e.g., precious metals rules). |
| Works of art | Original paintings, drawings, limited prints, sculpture | Works of art can have special situations (e.g., creator/heirs, imports). Make sure you apply the correct variant if relevant. |
| Collectors’ items | Stamps, coins, historic banknotes, memorabilia, certain collector sets | Not everything “collectable” qualifies. Document description carefully for stock records. |
Notable exclusions and “watch outs”
Common “don’t assume” areas:
- Goods bought with reclaimable VAT (normal VAT invoice where you could claim input tax) — usually not margin scheme.
- Precious metals, investment gold, precious stones — generally excluded from the basic margin scheme approach.
- Certain special sectors have extra rules (e.g., second-hand vehicles, pawn, auctioneers/agents, and high-volume low-price items under a global method).
If you operate in cars, auctions, or mixed imports/exports, it’s worth having your process reviewed before you scale.
How VAT is calculated
The core formula
For each eligible item:
Margin = Selling price − Purchase price
Then VAT due (standard rate) is usually calculated using the VAT fraction:
VAT due = Margin × 1/6 (which is 16.67% of the margin)
Why one-sixth? Because your selling price is treated as VAT-inclusive under the margin scheme. One-sixth is the fraction that extracts the VAT element from a VAT-inclusive figure at 20%.
Important: what counts as purchase price and selling price?
- Purchase price: what you paid to acquire the item itself (the eligible purchase).
- Selling price: what you charged your customer for the item (total).
Costs like repairs, cleaning, parts, servicing, platform fees, and overheads are real business costs, but they do not automatically increase the purchase price for margin scheme purposes.
You don’t “add repairs onto purchase price” to shrink the margin. Instead, you treat repairs/overheads as normal business expenses in your accounts (and input VAT may or may not be reclaimable depending on the invoice and rules).
If you want to reflect repair costs in pricing, you do it commercially — but the margin scheme margin is still based on purchase vs sale of the item itself.
Worked calculations
Example 1: Positive margin sale (VAT due)
- Purchase price (eligible): £300
- Selling price: £450
Margin = £450 − £300 = £150
VAT due = £150 × 1/6 = £25.00
So:
- Customer pays £450 (you do not show VAT separately)
- You account to HMRC for £25.00 VAT on that sale (subject to your overall VAT return totals)
Example 2: Break-even / negative margin sale (VAT due = £0)
- Purchase price (eligible): £600
- Selling price: £600 (break-even)
Margin = £600 − £600 = £0
VAT due = £0 × 1/6 = £0
If you make a loss, VAT due under the basic scheme for that item is still £0.
Key point: You generally can’t use the loss on one item to reduce VAT due on another profitable item (each item stands alone unless you’re using a specific global method that allows pooling under strict rules).
Example 3: Mixed costs
Scenario: You buy a used phone, refurb it, then sell it.
- Purchase price (eligible): £200 (bought from a private seller)
- Repairs/parts: £45 (invoice from a repair shop)
- Platform fees: £18
- Selling price: £320
Margin scheme margin is still:
Margin = £320 − £200 = £120
VAT due = £120 × 1/6 = £20.00
What about the £45 repairs and £18 fees?
- They affect your business profitability, but they don’t change the margin scheme purchase price.
- If the repair shop charged VAT and it’s valid input tax, you may be able to reclaim VAT on the repair invoice in the normal way (subject to the usual VAT rules).
- Platform fees may include VAT depending on provider and invoice details.
This is why good bookkeeping matters: margin scheme VAT is one calculation, and your overall accounts profitability is another.
Invoicing and receipts
What you can’t do on a margin scheme sales invoice
- Do not show VAT as a separate line.
- Do not show “VAT @ 20%” or a VAT amount for the goods.
- Do not issue a standard VAT invoice that suggests the buyer can reclaim input tax on the goods.
This is a big one for B2B customers: they may ask for a VAT invoice. Under the margin scheme, they can’t reclaim VAT on the goods because VAT isn’t being charged in the normal way on the full selling price.
What you should show
A typical margin scheme sales invoice should include:
- Your business name, address, and VAT number
- Invoice number and date
- Customer details (recommended)
- Clear description of the goods
- Total selling price
And include a margin scheme statement such as:
- “VAT Margin Scheme – second-hand goods.”
or, where appropriate: - “VAT Margin Scheme – works of art / antiques / collectors’ items.”
Keep descriptions specific enough to link to your stock record (e.g., model/serial, distinguishing features, registration number for vehicles, etc.).
Purchase evidence (what you need to keep)
You need evidence of how you acquired the goods and what you paid. Depending on where you source stock, this may include:
- Seller receipt / purchase invoice
- Auction invoice / vendor statement
- Signed purchase note for private purchases
- Online marketplace transaction evidence (plus seller details where possible)
If your purchase evidence is weak, your margin scheme position is weak. HMRC expects a clean audit trail.
Record keeping & compliance
Margin scheme compliance lives and dies on records.
Stock book style records (what HMRC expects in practice)
You should keep a “stock book” (it can be digital) that records, for each individual item:
Purchase-side (minimum):
- Unique stock number / ID
- Description of goods
- Purchase date
- Seller name and address (or identifying reference)
- Purchase invoice/receipt number
- Purchase price
Sale-side (minimum):
- Sale date
- Sales invoice number
- Selling price
- Margin
- VAT due on the margin
If you sell volume stock, your numbering and linking must be robust. If you can’t trace a sold item back to its eligible purchase, that sale may fall out of the scheme.
How long you must keep records
VAT records are generally expected to be kept for 6 years. That includes your stock records, invoices, and supporting documents.
VAT Return boxes
Margin scheme sales don’t disappear from your VAT Return — they’re just treated differently:
- Box 1: VAT due on the margins (output tax)
- Box 6: Total sales value (full selling price), adjusted as required by the scheme rules
- Box 7: Total purchases (purchase price of eligible goods)
Margin scheme purchases/sales are generally not included in boxes 8 and 9.
If you’re using accounting software, you’ll often need a consistent process (and sometimes journals) so the VAT Return reflects the correct margin VAT rather than “normal” output VAT.
Pros and cons
Pros
- Lower VAT cost compared to charging VAT on the full selling price.
- Helps keep consumer-facing prices competitive.
- Often improves cashflow, especially for dealers sourcing from private sellers.
- Makes certain business models (antiques, used cars, refurb resale) commercially viable at VAT-registered scale.
Cons
- Admin-heavy: strict records, correct invoices, and item-by-item tracking.
- Buyers (especially VAT-registered customers) can’t reclaim VAT on the goods — which can make you less attractive B2B.
- Easy to make expensive mistakes (wrong purchase type, missing seller details, VAT shown on invoice, etc.).
- Each item’s margin stands alone (losses don’t usually offset gains under the basic approach).
Best for
- Second-hand dealers selling mostly to the public
- Antique shops and vintage furniture sellers
- Used car dealers (with correct vehicle-specific rules)
- Refurbished electronics resellers who source from private individuals or eligible channels
Avoid if
- You mainly sell B2B and customers demand VAT invoices to reclaim input tax
- Most of your stock is bought from VAT-registered suppliers with standard VAT invoices (where input VAT is reclaimable)
- You don’t have the systems to track stock properly (yet)
Realistic mini case studies
1) Hannah Clarke in Leeds – vintage furniture reseller
Hannah buys vintage sideboards and chairs from house clearances and private sellers, then sells through Instagram and a small showroom.
- Purchase price (eligible): £420
- Selling price: £650
- Margin: £230
- VAT due: £230 × 1/6 = £38.33
Hannah invoices the customer for £650 with the note: “VAT Margin Scheme – second-hand goods.”
Her pricing stays competitive versus retailers charging VAT on the full selling price.
2) Imran Shah in Birmingham – used car pitch
Imran buys second-hand vehicles from private sellers and eligible trade sources, then sells locally.
Example car:
- Purchase price (eligible): £4,800
- Selling price: £5,700
- Margin: £900
- VAT due: £900 × 1/6 = £150.00
Imran keeps a vehicle stock record (including reg, VIN where appropriate, purchase source, and invoice references). He does not show VAT separately on the sales invoice. If a car is bought on a normal VAT invoice with reclaimable VAT, he treats that sale outside the margin scheme and accounts for VAT in the normal way.
3) Sophie Bennett in Bristol – refurbished electronics on eCommerce
Sophie buys used laptops from private sellers, refurbishes them, and sells online.
Laptop example:
- Purchase price (eligible): £260
- Selling price: £380
- Margin: £120
- VAT due: £120 × 1/6 = £20.00
She spends £55 on parts/repairs (with VAT charged on the repair invoice). That cost reduces her business profit, but her margin scheme VAT is still based on £380 − £260. Sophie’s bookkeeping separates: (1) margin scheme calculation for the goods, and (2) normal VAT treatment for repair invoices and overheads.
Common errors & how to avoid them
- Using the scheme on items bought with reclaimable VAT — check purchase invoices and supplier VAT status every time.
- Showing VAT on the sales invoice — margin scheme invoices must not show VAT separately.
- No stock number / weak audit trail — assign a unique ID to every item and link purchase-to-sale.
- Missing seller details for private purchases — collect names/addresses or robust identifying references.
- Mixing up “margin” with accounting profit — repairs and overheads don’t automatically change the margin calculation.
- Trying to offset losses against gains (basic scheme) — each item is treated individually unless you’re using a permitted global method.
- Incorrect VAT fraction — for standard rate margin calculations, it’s typically 1/6 of the margin, not 20% of the margin.
- Poor descriptions (“job lot”, “misc items”) — HMRC expects identifiable goods, especially for higher values.
- Software set up wrong — sales and purchases need to land in the correct VAT Return boxes without creating false output VAT.
- Assuming all second-hand goods qualify — eligibility depends on both the goods and how you acquired them.
FAQs
What is the VAT margin scheme?
It’s a UK VAT method where VAT is calculated on the margin (selling price minus purchase price) for certain goods, rather than on the full selling price. It’s commonly used by VAT-registered dealers in second-hand goods, antiques, works of art, and collectors’ items when they couldn’t reclaim VAT on purchase.
Can I use the scheme if I bought the item from a VAT-registered business?
Sometimes — but only if the purchase is eligible. If you bought it on a normal VAT invoice where input VAT is reclaimable, it’s usually not eligible. If you bought it from a dealer who sold it to you under a margin scheme (so VAT wasn’t separately reclaimable), it may be eligible with the correct paperwork.
How do I calculate VAT using the VAT fraction?
Work out the margin first: selling price − purchase price. Then apply the VAT fraction at the standard rate: VAT due = margin × 1/6 (16.67%). This extracts the VAT element from a VAT-inclusive margin. Keep the calculation item-by-item and record it in your stock records.
Can I use the VAT margin scheme if I make a loss on an item?
Yes, but if the margin is zero or negative, the VAT due on that item is £0. In most standard margin scheme cases, you can’t use a loss on one item to reduce VAT due on a different item where you made a profit. Each sale stands on its own for VAT purposes.
Can my customer reclaim VAT on a margin scheme purchase?
No — because you don’t show VAT separately on the invoice, and VAT isn’t charged in the normal way on the full selling price. This matters if you sell to VAT-registered businesses who expect a VAT invoice. In those cases, the margin scheme may be less attractive commercially.
Do repairs and refurbishment costs reduce the margin for VAT?
Not directly. The margin scheme calculation is based on purchase price and selling price of the goods. Repairs, parts, servicing, platform fees, and overheads affect your business profit, but they don’t automatically increase the margin scheme purchase price. Keep repair invoices and treat their VAT under normal input tax rules where applicable.
What wording should I put on the invoice?
Your invoice should show a single total price and must not show VAT separately. Include a clear statement such as “VAT Margin Scheme – second-hand goods” (or antiques/works of art/collectors’ items as appropriate). Also include enough detail to match the item to your stock record (stock ID, description, serial/reg where relevant).
What records does HMRC expect me to keep?
HMRC expects stock book-style records that link each purchase to each sale, including: stock number, description, purchase date and price, seller details, sales date and price, margin, and VAT due. Keep supporting purchase and sales invoices/receipts and retain VAT records for the standard retention period (commonly 6 years).
Can I start using the margin scheme immediately?
You can usually start using it as soon as you have the correct processes in place: eligible purchases, correct invoicing, and compliant records. The practical reality is that it’s safest to set up your stock tracking and invoice templates first, because errors can invalidate the treatment and create unexpected VAT liabilities.
Glossary
- Margin: The difference between the selling price and the purchase price for an eligible item under the scheme.
- VAT fraction: The fraction used to extract VAT from a VAT-inclusive figure. For standard-rate margin calculations it’s typically 1/6 (16.67%).
- Eligible goods: Categories that can qualify (second-hand goods, works of art, antiques, collectors’ items) when acquired in an eligible way.
- Purchase invoice/receipt: Evidence of what you paid and from whom. Under the scheme, the purchase evidence must support eligibility and traceability.
- Stock book: A record (paper or digital) tracking each item bought and sold under the scheme, with required details and calculations.
- VAT Return: The quarterly (or other period) return where you report VAT due and relevant sales/purchase totals, including margin scheme figures in the correct boxes.
- VAT registered: A business registered with HMRC for VAT, required to charge and account for VAT according to the rules (including optional schemes).
- Input tax: VAT on purchases/expenses that may be reclaimable (subject to rules). Often the reason margin scheme eligibility matters is because input tax wasn’t reclaimable on the goods.
- Output tax: VAT you owe to HMRC on sales — under the margin scheme, output tax is calculated on the margin, not the full selling price.
When to speak to an accountant
It’s smart to get advice early if any of these apply:
- You buy from mixed sources (private + VAT-registered suppliers + auctions + imports).
- You sell a mix of goods, some eligible and some not, and you need a clean system.
- You’re in used vehicles and want to be certain you’re applying the right vehicle rules.
- You’re unsure whether VAT on related costs (repairs, parts, auction fees) is reclaimable.
- You’ve had a VAT inspection query, or you’re correcting historic VAT Returns.
- You want to scale and need a process that works in your accounting software without constant manual fixes.
A short review now can save painful (and expensive) amendments later.
Conclusion
If you’re trading in second-hand goods, antiques, or refurbished stock, the margin scheme can be one of the most practical ways to stay competitive while remaining fully compliant — but only if you treat it as a system, not a guess.
If you’d like help setting up your margin scheme workflow (stock book structure, invoice wording, VAT Return treatment, and software process), BloomFinancials can support you from “messy but growing” to audit-ready.
Ready to get it right?
Book a consultation with BloomFinancials to review eligibility, tighten records, and make sure your VAT is calculated correctly — without overpaying or risking HMRC issues.
