The VAT margin scheme for second hand goods: the stock book HMRC will ask to see

Because you are working backwards from a VAT inclusive margin. The VAT due is 16.67%, or one sixth, of the margin.

Example. Ravensmere Reclamation buys a Victorian fireplace for £600 from a private seller, so no VAT is charged to it, and sells it for £900. The margin is £300. VAT due is one sixth of £300, which is £50. Outside the scheme, VAT on the full £900 selling price would be £150. The scheme is worth £100 on this single item, and a dealer turning over 300 items a year at similar margins is looking at £30,000.

That is precisely why HMRC checks the records carefully. The relief is significant and the burden of proving entitlement sits with you.

What must the stock book contain?

There is a prescribed list, and HMRC has no discretion to accept something different. For each item when you buy it:

• stock number, in numerical sequence
• date of purchase
• purchase invoice number, unless you made out the purchase invoice yourself
• purchase price
• name of the seller
• description of the item

And for each item when you sell it:

• date of sale
• sales invoice number
• selling price, or method of disposal
• name of the buyer
• margin on the sale, being selling price less purchase price
• VAT due, at one sixth of the margin

Tip. The two fields most often missing are the seller’s name on private purchases and the stock number tying the purchase to the sale. Without the link between the two entries there is no auditable margin, only two unrelated numbers.

What about the invoices?

Both sides have requirements, and one instruction runs through all of them.

A purchase invoice must show the date, the seller’s name and address, your name and address, the stock book number, the invoice number, a description, the total price, and the margin scheme being used. Where you buy from a private individual you make out the invoice yourself and both parties should keep a copy.

A sales invoice must show the date, your name, address and VAT registration number, the buyer’s details, the stock book number, the invoice number, a description, the total price, and the scheme applied.

Warning! On both, VAT must not be shown separately. This trips up sellers whose invoicing software adds a VAT line automatically. Showing the VAT converts what should be a margin scheme sale into an ordinary taxable supply in the customer’s hands, and creates an argument you do not want to have.

What happens if the records are not right?

This is the part worth understanding precisely, because it is often described more dramatically than the rules actually provide.

HMRC’s position is that where a business fails to keep the prescribed records, it forfeits the right to use the margin scheme in relation to those transactions that were not properly recorded. VAT on those supplies is then due on the full selling price, not on the margin. Where satisfactory evidence is not produced, tax is payable on the full value.

Two nuances matter.

It bites transaction by transaction. HMRC does not switch the scheme off across your whole business because some entries are incomplete. It assesses the transactions that are not properly evidenced. So the size of the problem depends on how much of your stock book is defective, not simply on whether it is imperfect.

There is a proportionality filter. HMRC’s guidance deals separately with minor non compliance and with unsatisfactory records, indicating officers consider severity before assessing on full value. The internal thresholds are not published.

The reverse also applies. Where goods that were never eligible have been put through a margin scheme, HMRC can assess on the full sales value of those too.

Example. Take the fireplace above. Properly recorded, the VAT is £50. If that transaction cannot be evidenced, VAT is due on the full £900, which is £150. The £100 difference is the entire relief, and on a defective run of 200 transactions that is £20,000 before interest and penalties.

How long do I keep it all?

Six years for VAT records generally. There is an extra point for this scheme: where you still hold stock acquired more than six years ago, you must retain the evidence showing those goods are eligible for as long as you hold them. Dealers in slow moving stock cannot simply apply a six year purge.

HMRC’s position is that the trader must establish entitlement by keeping, or reconstructing, evidence demonstrating the margin achieved on each eligible transaction.

Tip. That word “reconstructing” matters. Rebuilding incomplete records from purchase paperwork, bank records and listings before an officer arrives is far more effective than explaining afterwards why they are missing.

What should you do next?

If you use the margin scheme, speak to a Chartered Tax Adviser. There is more on our VAT Returns and E-Commerce and Online Retail pages, and a real case where records were rebuilt in time in our tax saving case studies.