VAT Margin Calculator

Understanding the Basics: What is the VAT Margin Scheme?

Before deciding if the scheme is right for you, it's important to understand what it is. The VAT Margin Scheme allows eligible businesses to account for VAT on the profit margin of certain goods, rather than on the full selling price.

Under normal VAT rules, you would:

• Charge VAT on the full selling price (output tax)
• Reclaim any VAT you paid on the purchase (input tax)

Under the Margin Scheme, you:

• Calculate VAT only on your profit margin (selling price minus purchase price)
• Pay 16.67% (one-sixth) of this margin as VAT

For a more detailed explanation, see our page on What is the VAT Margin Scheme?

Signs the Margin Scheme Might Be Right for Your Business

The Margin Scheme could be beneficial for your business if:

1. You Regularly Buy from the Public or Non-VAT Registered Sources

If a significant portion of your stock comes from private individuals, house clearances, or non-VAT registered businesses, the Margin Scheme could be highly advantageous. Since you can't reclaim VAT on purchases from these sources under standard VAT accounting, the Margin Scheme prevents you from having to pay VAT on the entire selling price.

2. You Deal in Eligible Goods

The scheme applies to:

• Second-hand goods
• Works of art
• Antiques (items over 100 years old)
• Collectibles

If your business specializes in these types of items, the scheme could be suitable.

3. Your Customers Are Mainly Private Individuals

If your customers are primarily not VAT-registered (i.e., they can't reclaim the VAT you charge them), the Margin Scheme can make your pricing more competitive. This is because you're paying VAT only on your margin, not the full selling price.

4. You Have Healthy Profit Margins

The narrower your profit margins, the more beneficial the Margin Scheme typically becomes. For example:

Signs the Margin Scheme Might NOT Be Right for Your Business

The scheme might not be suitable if:

1. You Primarily Buy from VAT-Registered Businesses

If most of your inventory comes with VAT invoices from VAT-registered suppliers, you're better off using standard VAT accounting in most cases. This is because you can reclaim the input VAT on your purchases, which you cannot do under the Margin Scheme.

2. Your Customers Are Mainly VAT-Registered Businesses

VAT-registered customers cannot reclaim VAT charged under the Margin Scheme. If your customers are primarily businesses that need to reclaim VAT, the standard VAT accounting method might be more appropriate as it allows them to reclaim the VAT you charge.

3. You're Not Prepared for the Record-Keeping Requirements

The Margin Scheme requires detailed record-keeping for each item, including:

• Description of the item
• Purchase price and date
• Selling price and date
• Documentation of purchase and sale

If you're not ready to maintain these detailed records, the scheme might create more administrative burden than benefit.

4. You Significantly Alter or Manufacture Items

If you do more than basic repair or restoration to items before selling them, the Margin Scheme might not be applicable. Significant alterations or manufacturing processes can make items ineligible for the scheme.

Practical Considerations

Financial Impact Assessment

Before making a decision, it's worth calculating the potential financial impact on your business. Use our VAT Margin Calculator to estimate the VAT you would pay under the Margin Scheme versus standard VAT accounting for your typical sales.

Mixed Inventory Strategies

It's possible to use the Margin Scheme for some items and standard VAT accounting for others. This requires careful record-keeping to distinguish between the two categories, but it can be the best approach for businesses with mixed inventory sources.

Implementation Considerations

If you decide to use the Margin Scheme:

• Update your accounting systems to handle Margin Scheme calculations
• Train staff on record-keeping requirements
• Revise invoice templates to include "Margin Scheme" wording
• Consider consulting with an accountant familiar with the scheme

Real Business Examples

Case Study 1: Independent Vintage Clothing Store

A vintage clothing shop sources 80% of its inventory from house clearances and private sellers. Most customers are fashion-conscious consumers, not businesses. By switching to the Margin Scheme, the shop reduced its VAT liability by approximately 70%, allowing it to either increase profit margins or offer more competitive prices.

Case Study 2: Used Car Dealership

A small used car dealership buys vehicles from both trade sources and private individuals. By using the Margin Scheme for cars purchased from private sellers and standard VAT accounting for trade purchases, they optimize their tax position while meeting all legal requirements.

Conclusion

The VAT Margin Scheme can offer substantial benefits for the right business, particularly those dealing in second-hand goods purchased from non-VAT registered sources and selling to private consumers. However, it's not a one-size-fits-all solution.

Assess your business model, inventory sources, customer base, and administrative capacity before deciding. Remember that it's possible to use both methods within the same business for different items, as long as proper records are maintained.

For businesses that fit the profile, the scheme can significantly reduce VAT liability, improve cash flow, and potentially offer a competitive advantage in pricing. If you're still unsure, consider consulting with a VAT specialist who can provide advice tailored to your specific business circumstances.