The core benefit: you pay far less VAT
The most significant advantage of the VAT Margin Scheme is straightforward: you pay VAT only on your profit, not on your full turnover. For a dealer buying second-hand goods from private individuals — who cannot provide a VAT invoice — this is transformative. Under standard VAT, you would owe output VAT on every pound of your sales revenue with no input VAT to offset. Under the margin scheme, your VAT bill is a fraction of that.
Take a dealer with £300,000 in annual sales and an average 30% gross margin. Under standard VAT, their output VAT liability on sales alone would be £50,000 per year (20% on the VAT-exclusive element). Under the margin scheme, VAT applies only to the £90,000 margin, giving a VAT liability of £15,000. The saving is £35,000 per year — not a trivial amount for any business.
The pros
- Dramatically lower VAT bill — for most second-hand dealers, this alone justifies using the scheme.
- No double taxation — the scheme recognises that the goods have already been through the VAT system once. You pay VAT only on the value you add, which is fair and economically logical.
- Flexible accounting methods — you can choose between individual item accounting and global accounting, depending on which suits your business. Global accounting is simpler for high-volume dealers; individual item accounting gives more precise control.
- Works alongside standard VAT — if you sell both second-hand and new goods, you can use the margin scheme for eligible items and standard VAT for the rest.
- No VAT shown on sales invoices — margin scheme sales invoices do not show VAT separately, which simplifies customer-facing pricing and removes the expectation that buyers can reclaim input VAT.
The cons
- More detailed record-keeping — HMRC requires a stock book with specific information for every eligible item bought and sold. This is more work than standard VAT record-keeping and cannot be left to catch-up later.
- No input VAT reclaim on item-related costs — you cannot reclaim VAT on repairs, reconditioning, or other direct costs associated with margin scheme items. This is the price of paying VAT only on your margin.
- Most standard accounting software does not support it natively — Xero, QuickBooks, Sage, and most general platforms are built for standard VAT. Margin scheme dealers typically need dedicated software or significant manual workarounds.
- Complexity if you mix eligible and ineligible stock — keeping two VAT accounting streams running side by side requires careful stock segregation and disciplined record-keeping.
- Items must be genuinely eligible — buying from the wrong seller type, or inadvertently receiving a VAT invoice, can knock items out of the scheme and expose you to a larger VAT bill on those sales.
When the margin scheme clearly makes sense
The margin scheme is the right choice if you regularly buy second-hand goods from private individuals or non-VAT-registered sellers, your selling prices are meaningfully higher than your purchase prices, and you are VAT-registered (or approaching the registration threshold). For car dealers, antique dealers, second-hand electronics sellers, and most resale businesses, this description fits precisely.
When to think carefully
The calculation shifts if you buy predominantly from VAT-registered businesses (in which case you can reclaim input VAT under standard accounting anyway), or if your margins are extremely thin and your volume is very high with lots of administrative complexity. In those cases, it is worth modelling both approaches with your accountant before committing.
The official HMRC guidance on who can use the scheme and how it works is available at gov.uk/guidance/vat-margin-schemes.
Making the record-keeping manageable
The biggest practical obstacle to using the margin scheme well is the record-keeping burden. AutoVAT eliminates that obstacle. We connect to your sales platforms and buying records, maintain your stock book automatically, calculate margins per item, and keep your records HMRC-ready at all times. The VAT saving remains; the admin burden does not. Get in touch to find out how AutoVAT works for your business.
