How to work out the margin and VAT due using VAT margin schemes
How to work out the margin and VAT due and how to calculate the purchase and selling price.
You should:
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Work out the purchase price and selling price of the item (read the section titled ‘Margin and VAT calculation example’).
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Take away the purchase price from the selling price to work out the gross margin.
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Multiply the gross margin by the relevant VAT fraction (where 20% standard rate VAT applies, this is 1/6).
This is the VAT due on the supply.
Margin and VAT calculation example
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You buy a second-hand piece of furniture for £1,500 and sell it for £2,000.
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You calculate the margin by deducting the purchase price from the selling price: £2,000 - £1,500 = £500.
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You calculate the VAT by multiplying the margin (£500) by the relevant VAT fraction (where 20% standard rate VAT applies this is 1/6): £500 × 1/6 = £83.33.
For reduced rate goods (effective VAT rate 5%), multiply the margin by 1/21.
If you sell zero-rated goods, for example antique books, your margin will also be zero-rated.
The VAT due is the difference between what you paid for the goods and what you sold them for, not the overall profit you have made on them.
Purchase price
The purchase price is everything you pay (the consideration) for the goods. Notice 700, section 7.2 explains consideration.
You can reclaim VAT you’re charged on any usual:
- business overheads
- repairs
- parts or accessories
These will be subject to the normal rules.
But you must not add any of these costs to the purchase price.
For example, if you purchase new parts and fit them to a second-hand clock, you cannot add the cost of those parts to the purchase price you use when you calculate your margin.
Selling price
The selling price is everything you receive (the consideration) for the goods, whether from the buyer or a third party, including incidental expenses directly linked to the sale.
VAT returns
You must show any goods you buy or sell using a margin scheme on your VAT return.