Why record-keeping is the foundation of the margin scheme
The VAT Margin Scheme is built on trust. HMRC allows you to pay VAT only on your profit rather than your full turnover, and in exchange they require you to maintain a stock book that proves, item by item, exactly what you paid and what you received. Without complete records, HMRC can disallow the scheme and assess VAT on your full selling prices — which is almost always a far larger bill.
HMRC's requirements are set out in VAT Notice 718. This guide summarises the key obligations in plain English.
The stock book: your central record
Every business using the VAT Margin Scheme must maintain a stock book. This is a running record of every eligible item you buy and sell. It can be a spreadsheet, a dedicated software system, or a physical ledger — format is not mandated — but it must contain specific information for each item.
For each purchase, your stock book must record:
- A unique stock number for the item
- A full description of the item (sufficient to identify it — for vehicles this means make, model, year, and VIN or registration)
- The date of purchase
- The purchase price (what you paid)
- The name and address of the person or business you bought it from
For each sale, the same stock number must link to:
- The date of sale
- The selling price (what you received)
- The name and address of the buyer
- The calculated margin (selling price minus purchase price)
- The VAT due on that margin
Important: do not show VAT on your sales invoices
This is a point that trips up many dealers, particularly those using platforms or accounting software not built for the margin scheme. When you sell an item under the margin scheme, your sales invoice must not show a separate VAT amount. It should state that the item is sold under the VAT Margin Scheme, but the VAT element is embedded in the price and must not be itemised.
The tax charge on your invoices and in your sales platform should be set to zero or "no VAT" for margin scheme items. Do not apply a standard 20% VAT rate to these products — doing so creates an incorrect VAT invoice that misrepresents the tax treatment and gives your buyer the impression they can reclaim input VAT, which they cannot on a margin scheme purchase.
A note for sellers using Shopify and similar platforms
Shopify and most general e-commerce platforms do not natively support the VAT Margin Scheme. They are designed around standard VAT, where tax is charged on the full selling price. If you sell margin scheme goods through Shopify, the platform will not calculate or display VAT correctly for margin scheme purposes out of the box.
The typical workaround is to set the tax rate on margin scheme products to zero within Shopify, so no VAT appears on the customer's invoice. Your actual margin scheme VAT is then calculated separately outside the platform. This is workable, but it requires care to ensure the right products are always set up correctly and that your margin calculations happen reliably elsewhere.
AutoVAT can build a customised solution around your Shopify setup — capturing your sales data, matching it to your purchase records, and calculating the correct margin scheme VAT — so your compliance does not depend on manual workarounds. Get in touch to discuss your specific setup.
How long do you need to keep records?
HMRC requires you to keep all VAT records, including your margin scheme stock book, for at least six years. This applies whether your records are digital or physical. Under Making Tax Digital for VAT, digital records must be maintained in a compatible format. See HMRC's VAT record-keeping guidance for the full requirements.
What happens if your records are incomplete?
If HMRC inspects your records and finds them incomplete or inaccurate, they can disallow the margin scheme for some or all of your sales and reassess VAT on the full selling prices. They can also impose penalties and interest on any underpaid VAT. Keeping a complete, contemporaneous stock book — updated at the time of each transaction, not reconstructed later — is the only reliable way to protect yourself.
Keeping records without the admin burden
AutoVAT maintains your stock book automatically, capturing purchase and sale data from the platforms and systems you already use. Every item is tracked with the full details HMRC requires, so your records are always complete and up to date — without you having to update a spreadsheet manually after every transaction. Get in touch to see how it works for your business.
