Stock Book & Record Keeping
for the VAT Margin Scheme

Why Record Keeping Matters

Record keeping is the single most important obligation you have when operating under the VAT Margin Scheme. HMRC grants you the considerable benefit of paying VAT only on your profit margin, but in return they require meticulous records that prove every purchase and sale is genuine and correctly accounted for. Without these records, HMRC has no way to verify that the margin you’ve declared is accurate - and if they can’t verify it, they can disallow the scheme entirely.

HMRC can request to inspect your margin scheme records at any time. Unlike a standard VAT inspection where the focus is on invoices and returns, a margin scheme inspection specifically targets your stock book and supporting documentation. Officers will cross-reference purchase records against sales, check that stock numbers match, and look for any gaps or inconsistencies that might indicate under-reporting of margins or fictitious purchases designed to reduce the taxable margin.

The good news is that once you understand what’s required, maintaining proper records is straightforward and becomes routine. This guide walks you through everything HMRC expects, from the stock book structure to the specific data you need to capture for every transaction. Whether you sell used cars, antiques, or second-hand goods on eBay, the requirements are the same.

The Stock Book

At the heart of VAT Margin Scheme record keeping is the stock book. This is a dedicated record - separate from your normal sales ledger - that tracks every eligible item from purchase through to sale. HMRC requires the stock book because the Margin Scheme operates on an item-by-item basis (unless you use Global Accounting), and each item must be individually traceable.

Your stock book can be a physical ledger, a spreadsheet, a database, or any digital system - HMRC does not mandate a specific format. What matters is that it contains the required information and is available for inspection. Many dealers use a combination of a spreadsheet for the stock book and a filing system (physical or digital) for supporting documents like receipts and invoices.

What Must Be Recorded for Each Item

The description of goods should be sufficiently detailed that HMRC can identify the item. “Vase” is too vague; “Blue and white Delft ceramic vase, 25cm, minor chip to rim” is specific enough. For vehicles, always include make, model, year, and registration number. The stock book must link each purchase entry to its corresponding sale entry via the stock number, creating a complete audit trail.

Purchase Records in Detail

Your purchase records are the foundation of the Margin Scheme because they establish the purchase price used to calculate the margin. If you cannot prove what you paid for an item, HMRC may treat the purchase price as zero - meaning VAT would be due on one-sixth of the entire selling price.

What Constitutes a Valid Purchase Record?

A valid purchase record is any documentation that proves the transaction took place and the amount paid. The ideal is a written receipt or invoice from the seller, but HMRC recognises that when buying from private individuals - at car boot sales, house clearances, or through classified ads - a formal invoice is not always available. In these cases, you should create your own purchase record at the time of the transaction that includes the seller’s name and address, date, description of goods, and amount paid.

Evidence to Keep

• Written receipts from sellers (even handwritten ones are valid)
• Bank statements or payment records showing the transfer
• Auction records - lot numbers, buyer’s premium statements, and settlement invoices
• Online marketplace records - purchase confirmations, PayPal/bank transfers
• Self-created purchase invoices when buying from private sellers (signed by both parties if possible)

Special Cases

Charity shop purchases: Get a receipt showing the charity’s name, date, item description, and price paid. Most charity shops will provide one on request. The receipt proves the item was purchased from a non-VAT-registered source (most charities are VAT-exempt on donated goods sales).

House clearances: When buying multiple items as a job lot, you need to apportion the total price across individual items in your stock book. Record the total price paid, the seller’s details, and your method of apportionment. HMRC accepts reasonable estimates - the key is consistency and documentation of your method.

Items received free or as gifts: If you receive an item at no cost (e.g., gifted stock), the purchase price is zero, but you must still record it in your stock book. VAT will be due on one-sixth of the full selling price.

Sale Records in Detail

Every sale under the Margin Scheme must be recorded in your stock book and supported by a sales invoice. However, margin scheme invoices are subject to specific rules that differ from standard VAT invoices.

Margin Scheme Invoice Requirements

A margin scheme invoice must include your business name, address, and VAT registration number, a unique invoice number, the date of the sale, a description of the goods, and the total selling price. Crucially, you must not show VAT separately on a margin scheme invoice. The selling price is the gross amount. You should also include the words “Margin scheme - second-hand goods” (or the equivalent for works of art, antiques, or collectors’ items) to clearly identify that the item was sold under the scheme.

When You Need Buyer Details

For individual items sold for more than £500, you must record the buyer’s name and address. This is an anti-fraud measure that allows HMRC to verify transactions. For items sold at £500 or below, buyer details are not mandatory, though it is good practice to record them when available (e.g., online marketplace buyer usernames).

Digital vs Paper Invoices

HMRC accepts both digital and paper invoices. If you sell through online marketplaces, the platform’s order confirmation often serves as the sales record, but you should still maintain your own invoice sequence for your stock book. Many sellers use spreadsheets or accounting software to generate numbered invoices automatically. If you use our VAT Margin Calculator, the export feature creates records that include all required invoice fields.

How Long to Keep Records

HMRC requires that you keep all VAT Margin Scheme records for a minimum of 6 years. This includes your stock book, purchase receipts, sales invoices, bank statements relating to transactions, and any other supporting documentation. The 6-year period runs from the date of the transaction, not from the end of the VAT period in which it falls.

This obligation does not end when you close your business, deregister for VAT, or stop using the Margin Scheme. If you sold items under the scheme in 2026 and closed the business in 2027, you must still keep those records accessible until at least 2032. HMRC can open an enquiry into past periods, and “I closed the business and threw the records away” is not a defence.

Digital records are acceptable provided they are complete, accurate, and accessible. HMRC may ask you to provide records in a specific format during an inspection, so using standard formats like spreadsheets or CSV files is advisable. Photographs of physical receipts are acceptable as backups, but keep the originals where possible - a faded photo of a scrawled receipt may not satisfy an inspector.

The Global Accounting Method

Global Accounting is a simplified alternative to the standard item-by-item stock book method. It is available for items purchased at £500 or less each. Instead of calculating the margin on every individual item, you total all eligible purchases and all eligible sales for each VAT period, then calculate the VAT due on the overall margin for the period.

The key advantage is reduced administrative burden. If you sell dozens or hundreds of low-value items each quarter - such as books, clothing, small collectibles, or bric-a-brac - tracking every single item through a stock book can be impractical. Global Accounting lets you work with totals instead. You still need to keep purchase and sale records, but you do not need to match each sale to a specific purchase.

One important difference from the item-by-item method: under Global Accounting, if your total purchases exceed total sales in a period (a negative margin), you can carry the surplus forward to the next period. This is not permitted with individual item margins. This makes Global Accounting particularly useful for businesses that stockpile inventory - you buy heavily one quarter and sell the next.

When to Use Each Method

Digital Record Keeping

HMRC actively encourages digital record keeping, and under Making Tax Digital (MTD) for VAT, you are already required to maintain your VAT records digitally and submit returns using compatible software. While MTD does not specifically mandate how you keep your margin scheme stock book, using digital tools creates a more robust, searchable, and exportable record than paper ledgers.

Options for Digital Stock Books

• Spreadsheets (Excel, Google Sheets) - flexible and widely used, but require discipline to maintain consistently. Use templates with data validation to reduce errors.
• Accounting software (Xero, QuickBooks, FreeAgent) - some packages have margin scheme modules or can be configured to track margin sales. They integrate with MTD submissions.
• Specialist dealer management systems - common in the used car trade, these track vehicles from purchase through preparation to sale with integrated stock books.
• Our VAT Margin Calculator - calculates margins, tracks history, and exports to CSV for compliance records. Particularly useful for marketplace sellers who need to factor in platform fees.

Making Tax Digital Implications

MTD requires that your VAT records are kept digitally and that there are “digital links” between your records and your VAT return. In practice, this means that the figures on your VAT return should be derived from your digital records without manual re-keying. If your stock book is in a spreadsheet and your VAT return is filed through compatible software, you need a digital link between them - typically an export/import process or API connection.

HMRC Inspections

HMRC conducts both routine compliance checks and risk-based inspections of margin scheme records. A routine check may be part of a general VAT inspection, while targeted inspections are triggered by specific risk indicators. Understanding what triggers an inspection - and what inspectors look for - helps you prepare and avoid problems.

What Triggers an Inspection?

• Consistently low or zero margins - if your margins seem implausibly low compared to industry norms, HMRC may suspect inflated purchase prices
• Sudden changes in turnover or margin patterns - a sharp increase in purchases without corresponding sales growth
• Information from third parties - HMRC receives data from online platforms, auction houses, and payment providers
• Random selection - some inspections are purely routine with no specific trigger
• Repayment claims - if you frequently claim VAT repayments (negative margins under Global Accounting), expect closer scrutiny

What Inspectors Look For

During an inspection, the HMRC officer will typically ask to see your complete stock book, a sample of purchase records with supporting evidence, corresponding sale records and invoices, your method of calculating the margin for VAT returns, and any records for items still in stock. They will cross-reference entries, check for gaps in stock numbering, verify that purchase prices match receipts, and ensure that selling prices match bank deposits or marketplace payout reports.

How to Prepare

The best preparation is ongoing good practice. Keep your stock book current - do not let entries pile up. File purchase receipts promptly (photograph them on the day if they’re on thermal paper that fades). Reconcile your stock book to your VAT return each quarter. If you discover errors, correct them proactively by making an adjustment on your next VAT return. HMRC is far more lenient with businesses that identify and correct their own mistakes than with those who are caught during an inspection.

Penalties for Poor Record Keeping

HMRC takes record keeping obligations seriously, and the penalties for non-compliance can be severe. The consequences depend on whether the failing is careless or deliberate, and whether it leads to an inaccuracy on your VAT return.

The most damaging outcome is having the Margin Scheme withdrawn. If HMRC determines that your records are so poor that they cannot verify the scheme was applied correctly, they can remove your right to use it - potentially backdated. You would then owe VAT on the full selling price of all items for the period under review, minus any input VAT you can reclaim (which, for purchases from private individuals, is zero). For a business turning over £200,000 in margin scheme sales, this could result in an additional VAT liability of over £33,000 plus penalties and interest.

If you discover errors in your records or past VAT returns, correct them as soon as possible. You can adjust errors of up to £10,000 (or 1% of turnover up to £50,000) on your next VAT return. Larger errors require a separate disclosure to HMRC using form VAT652.

Record Keeping Checklist

Use this checklist to ensure you capture everything HMRC requires for each transaction under the VAT Margin Scheme.