What Is the VAT Margin Scheme?
The VAT Margin Scheme is an HMRC-approved method of accounting for VAT that allows VAT-registered businesses to pay VAT only on the profit margin of a sale, rather than on the full selling price. It was introduced to prevent the unfair double-taxation of goods that have already been through the VAT system once.
Under normal VAT rules, a business charges VAT on the entire selling price and reclaims VAT on its purchases. But when you buy second-hand goods from a private individual, there’s no VAT on the purchase to reclaim. Without the Margin Scheme, you’d be paying 20% VAT on the full selling price with nothing to offset it - making many second-hand goods trades unviable.
The scheme applies to four specific categories of goods:
- Second-hand goods - any tangible moveable property that is suitable for further use as it is or after repair
- Works of art - paintings, collages, drawings, engravings, lithographs, sculptures, tapestries, ceramics, and photographs by the artist
- Antiques - items over 100 years old (excluding works of art or collectors’ items)
- Collectors’ items - stamps, coins, currency, and specimens for zoological, botanical, or similar collections
Key point: Under the Margin Scheme, you only pay VAT on the difference between what you paid for an item and what you sold it for. If you buy a vase for £200 and sell it for £350, you pay VAT on the £150 margin - not on the full £350.
The scheme is governed by VAT Notice 718 (margin schemes for second-hand goods, works of art, antiques and collectors’ items) issued by HMRC. Using the scheme is optional - you can choose to apply normal VAT accounting on any transaction - but for most second-hand goods dealers, it’s essential for maintaining competitive pricing.
Who Can Use the VAT Margin Scheme?
To use the Margin Scheme, your business must be VAT-registered. There is no separate application or approval process - you simply start using it when the conditions are met. However, the eligibility hinges entirely on who you buy from and the nature of the goods.
You can use the scheme when you buy from:
Private individuals
Non-VAT-registered people selling personal possessions. This is the most common scenario.
Other margin scheme sellers
Another business that sold the item under the Margin Scheme (no VAT was shown on their invoice).
VAT-exempt businesses
Businesses where no input VAT was reclaimable on the goods (e.g., insurance companies disposing of claims stock).
Non-UK businesses
Businesses outside the UK that are not registered for VAT in the UK.
You CANNOT use the scheme for: New goods, goods purchased with a VAT invoice where you reclaimed the input VAT, precious metals, or investment gold. If you receive a standard VAT invoice with VAT separately identified, you must use normal VAT accounting for that item.
In practice, the most common users of the Margin Scheme are antiques dealers, second-hand car dealers, vintage and retro sellers, charity shops, auctioneers, and eBay/marketplace sellers dealing in used goods bought from the public.
How the Calculation Works
The Margin Scheme calculation is straightforward in principle. You calculate the margin on each item sold, and then extract the VAT from that margin. The key formula is:
The reason you divide by 6 (rather than multiplying by 20%) is that the margin is treated as VAT-inclusive. The selling price you charge already has VAT embedded within the margin. One-sixth of the margin equates to the standard 20% VAT rate applied to the net margin amount (since 1/6 = 16.67%, and the VAT-exclusive portion is 5/6 of the margin, with 20% of 5/6 = 1/6).
Important: If the margin is zero or negative (you sold at or below purchase price), no VAT is due. You cannot carry forward negative margins to offset against future profitable sales under the standard item-by-item method.
Worked Examples
Example A: Standard Profitable Sale
£500
£800
Example B: Sale at a Loss
£200
£150
Example C: eBay Sale with Fees (Antiques Category - 10.9%)
£1,000
£2,500
Assumes VAT-registered seller reclaiming VAT on eBay fees. Without VAT reclaim on fees, total eBay fees would be £337.98 (inc. 20% VAT) and net profit would be £912.02. See our eBay fees guide for the full breakdown.
Want to run your own numbers? Our free VAT Margin Calculator handles the maths instantly, including eBay and marketplace fees.
Eligible Goods
Not everything can be sold under the Margin Scheme. HMRC defines strict categories of eligible goods, and there are important exclusions to be aware of.
Eligible under the scheme
Second-hand goods
Any tangible, moveable property that is suitable for further use as it is or after repair. This covers the vast majority of used items: furniture, electronics, clothing, vehicles, tools, books, musical instruments, and much more.
Works of art
Paintings, collages, drawings, engravings, prints, lithographs, sculptures and statuary, tapestries, ceramics, and enamels. Photographs taken and printed by the artist also qualify.
Antiques
Items that are more than 100 years old, other than works of art or collectors’ items. The age is determined at the time of supply. Period furniture, vintage clocks, and historical artefacts typically fall into this category.
Collectors’ items
Postage stamps, revenue stamps, first-day covers, pre-stamped stationery, coins, and currency that are not legal tender. Also includes specimens for zoological, botanical, mineralogical, anatomical, or ethnographic collections.
NOT eligible
- Precious metals (gold, silver, platinum) - these fall under a separate VAT scheme
- Gemstones - also subject to different rules
- New goods - the scheme is exclusively for pre-owned items
- Items where input VAT was reclaimed - if you recovered VAT on purchase, you must use normal VAT accounting on sale
- Services - the Margin Scheme only applies to goods, not services
Watch out: If you mix new and second-hand stock, you must track which items are sold under the Margin Scheme and which under normal VAT rules. Applying the wrong method to an item is a common cause of VAT errors at inspection.
Record Keeping Requirements
HMRC requires Margin Scheme users to maintain a stock book (or equivalent records) that tracks every item bought and sold under the scheme. This is a legal requirement, and HMRC can inspect your records at any time. Failure to maintain proper records can result in HMRC denying use of the scheme and assessing VAT on the full selling price.
What your stock book must record
P Purchase Records
- Stock number (unique reference for each item)
- Date of purchase
- Purchase price
- Supplier name and address
- Description of the item
S Sale Records
- Stock number (matching the purchase entry)
- Date of sale
- Selling price
- Buyer details (name/address for items £500+)
- VAT margin calculation
Retention period: You must keep all Margin Scheme records for 6 years. This includes the stock book, purchase receipts, and sale invoices. HMRC has the right to inspect your records during this period, and inability to produce them may result in loss of the scheme and retrospective VAT assessments.
Your stock book can be physical or digital - HMRC doesn’t mandate a specific format, only that the information is complete and easily accessible. Many sellers use spreadsheets, while larger operations integrate stock tracking into their accounting or inventory management software. Under Making Tax Digital, digital records are now required for VAT purposes, so a spreadsheet or software-based system is strongly recommended.
Invoice Rules
One of the most important - and most commonly broken - rules of the Margin Scheme relates to how you invoice. The rules are fundamentally different from standard VAT invoicing.
Critical rule: You must NOT show VAT separately on Margin Scheme invoices. If you show VAT as a separate line item, the buyer may attempt to reclaim it as input VAT - which is not permitted under the scheme. Showing VAT separately can also invalidate your use of the scheme for that transaction.
What your invoice must include
- Your business name, address, and VAT registration number
- Unique invoice number
- Date of sale
- Buyer’s name and address
- Description of the goods
- Total price (VAT inclusive - the VAT is embedded, not shown separately)
Recommended wording: Include a statement on your invoice such as: “This item is sold under the VAT Margin Scheme. VAT is included in the total price and cannot be reclaimed separately.” While not strictly mandatory, this wording prevents buyers from assuming they can reclaim input VAT.
For online marketplace sales (eBay, Etsy, etc.), the platform-generated order confirmation typically serves as the buyer’s receipt. You should still maintain your own records, but you do not generally need to issue a separate invoice unless the buyer requests one. If you do issue one, follow the rules above.
VAT Return Reporting
Reporting Margin Scheme transactions on your VAT return requires care. The amounts go in specific boxes and the rules differ from standard VAT accounting.
| VAT Return Box | What to Enter |
|---|---|
| Box 1 | The VAT amount due on your margins (i.e., the total of all margin ÷ 6 calculations for the period) |
| Box 6 | The full selling price of all margin scheme items sold - not just the margin. This is the gross sales value. |
| Box 7 | The full purchase price of all margin scheme items bought in the period (including those not yet sold) |
Worked example: VAT return period
During a VAT quarter, you make three margin scheme sales:
| Item | Purchase | Sale | Margin | VAT Due |
|---|---|---|---|---|
| Victorian desk | £400 | £750 | £350 | £58.33 |
| Oil painting | £200 | £180 | −£20 | £0.00 |
| Vintage guitar | £600 | £950 | £350 | £58.33 |
| Totals | £1,200 | £1,880 | £680 | £116.66 |
Box 1: £116.66 (total VAT due on positive margins)
Box 6: £1,880 (full selling prices of all margin scheme sales)
Box 7: £1,200 (full purchase prices of items bought this period)
Common mistake: Many sellers put only the margin in Box 6, not the full selling price. This is incorrect and will cause discrepancies if HMRC cross-references your turnover figures with third-party data (such as eBay’s mandatory reporting to HMRC).
Global Accounting
Global Accounting is a simplified version of the Margin Scheme designed for businesses that deal in high volumes of low-value items. Instead of calculating the margin on every single item sold, you calculate the overall margin for the entire VAT period based on total purchases versus total sales.
Eligibility
You can use Global Accounting for items that you purchase for £500 or less each. Items bought for more than £500 must be accounted for individually under the standard margin scheme method.
How it works
The key advantage of Global Accounting is that negative margins on individual items offset positive margins on others within the same VAT period. Under the standard item-by-item method, you cannot offset losses - you simply pay no VAT on loss-making sales, but the losses don’t reduce the VAT on your profitable sales.
When Global Accounting saves money: If you regularly sell some items at a loss (common in mixed lots, auction clearances, or car-boot-sale stock), Global Accounting lets those losses reduce your overall VAT bill. For a business buying and selling dozens of small items per week, the administrative savings are substantial too - no need to track margins on individual items under £500.
Carrying forward negative margins
If your total purchases exceed your total sales in a Global Accounting period (i.e., you have a negative overall margin), no VAT is due for that period. The excess purchases can be carried forward to the next period and added to the purchases figure, reducing the margin (and therefore the VAT) in the next period. This is a significant advantage over the item-by-item method.
Record keeping under Global Accounting: You still need to keep records of each purchase and sale, but you don’t need to link specific purchases to specific sales. Your stock book requirements are slightly simpler, but HMRC still expects you to record supplier details, purchase dates, descriptions, and prices for every item.
Common Mistakes to Avoid
After years of helping sellers navigate the Margin Scheme, these are the errors we see most frequently. Some can trigger HMRC assessments, penalties, or loss of the right to use the scheme entirely.
Showing VAT separately on invoices
This is the single most common error. Under the Margin Scheme, the price you charge is VAT-inclusive with VAT embedded in the margin. Showing a separate VAT line invites buyers to reclaim input VAT they’re not entitled to and can invalidate your use of the scheme for that transaction. HMRC may then assess VAT on the full selling price.
Using the scheme for new goods or items where VAT was reclaimed
The Margin Scheme is strictly for eligible second-hand goods. If you bought an item with a standard VAT invoice and reclaimed the input VAT, you must account for VAT normally on the sale. Mixing new and used stock without proper tracking is a red flag at inspection.
Not maintaining a stock book
HMRC is unambiguous: no proper records, no Margin Scheme. If you can’t produce a stock book at inspection, HMRC will assess VAT on the full selling price of every item. For a business turning over £100,000 in margin scheme sales, that could mean an unexpected £16,667 VAT bill plus penalties and interest.
Trying to offset losses against profits (item-by-item method)
Under the standard item-by-item method, a negative margin simply means no VAT is due on that item. You cannot carry that loss forward or offset it against profitable items. If you regularly sell items at a loss, consider switching to Global Accounting, which does allow offsetting.
Entering only the margin in Box 6 of the VAT return
Box 6 requires the full selling price, not the margin. This is a trap because it feels counterintuitive - you’re only paying VAT on the margin, so why declare the full sale price? But HMRC uses Box 6 for turnover reporting, and it must reflect total sales. Underdeclaring here triggers automated compliance checks.
Forgetting to account for selling platform fees in profitability calculations
While platform fees don’t affect the VAT Margin Scheme calculation itself (VAT is always on selling price minus purchase price), they have a massive impact on your actual take-home profit. Many sellers discover they’re making far less than expected once eBay fees, payment processing, and postage are factored in. Use our calculator to see the real numbers.
Calculate Your VAT Margin Instantly
Stop guessing and see exactly how much VAT you owe, what your eBay fees will be, and what you’ll actually take home from every sale. Our free calculator handles the entire Margin Scheme calculation for you.