VAT: Calculating the Profit Margin When Selling Second-Hand Goods

If a business buys and sells second-hand goods, it can use one of the second-hand margin schemes so that VAT is only due on the profit margin, not the full selling price. When using a second-hand scheme, there are a number of points that should be taken into account.

What is a Margin Scheme?

A second-hand margin scheme allows businesses to reduce the amount of VAT that would normally be due. When a business buys second-hand goods from a private individual, it does not charge VAT so there would be no input VAT to offset against the output tax that would be charged. The margin schemes allow the business to only account for VAT on the profit margin it achieves on the sale.

So, for example, if a business bought a second-hand table for £50 and sold it for £75, the profit margin would be £25 and the VAT due would be £4.16 (i.e., £25 divided by 6) rather than £12.50 using normal accounting. On the downside, a business would need to keep a detailed stock book showing the purchase and sale prices of all the items sold, so that it could calculate the profit margin.

Another feature of normal margin schemes is that if a business buys an item for £100 but ends up only selling it for £80, no VAT is due but the business cannot offset the loss against the profits on the sales of other items.

Global Accounting

Global Accounting is an optional, simplified variation of the margin scheme.

Under Global Accounting, VAT is due on the difference between the total eligible purchases and total eligible sales. This means that losses on the sales of some items are offset against the profits on the sales of others, meaning that the amount of output tax due in a period is less than it would be under a normal margin scheme.

What Other Items can Affect the Profit Margin?

If a second-hand item requires repair, the repair costs cannot be deducted from the profit margin; this is a common error for businesses using a margin scheme. Another common error with businesses selling second-hand goods through online platforms is to deduct the seller’s fees from the profit margin; the fees should not be deducted from the profit margin. Businesses should also remember to apply the reverse charge where the online platform is based overseas, for example Amazon.

The selling price is everything which the business receives for the goods, whether from the buyer or a third party. It includes incidental expenses directly linked to the sale which have been charged to the customer, for example:

  • commission;
  • packaging;
  • transport; and
  • insurance costs.

Optional extras charged to the buyer, including any insurance provided by a third party, and disbursements do not form part of the selling price; the business should account for these separately outside the margin scheme.

The purchase price is everything which the business had to pay for the goods, it will mirror the rules for the selling price above. It includes incidental expenses directly linked to the purchase which the business was charged by the supplier, for example:

  • commission;
  • packaging;
  • transport; and
  • insurance costs.

The margin schemes tax the difference between what a business paid for the item and what it sold it for, not the overall profit the business has made on it.

Practical Tip

The use of a margin scheme when selling secondhand goods reduces the amount of VAT due to HMRC; but remember to calculate the profit margin correctly to avoid any problems.

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