VAT Margin Schemes: Second-Hand Goods, Cars and Antiques

Margin schemes are conditional on record-keeping, and the penalty for failing a condition is not proportionate to the failure. Denial means VAT on the full selling price of goods that carried no recoverable input tax, an assessment several times the margin actually earned.

Why Margin Schemes Generate So Many Assessments

Under a margin scheme, VAT is accounted for on the difference between the purchase price and the selling price rather than on the full selling price. For a dealer in used cars, antiques, collectors’ items or second-hand goods generally, that is the difference between a viable business and an unviable one.

The schemes are also unusually unforgiving. They are conditional on record-keeping, and the consequence of failing a condition is not a small adjustment: HMRC assesses output tax on the full selling price of every affected sale, with no credit for the purchase, because there was no input tax to recover in the first place. A modest documentary failure can produce an assessment several times the actual margin earned.

Eligibility

Broadly, the goods must be eligible (second-hand goods, works of art, antiques or collectors’ items), and must have been acquired in circumstances where no VAT was chargeable or recoverable on the purchase. Common eligibility disputes involve:

• Goods bought on a VAT invoice with VAT charged separately. These cannot go into the scheme; the input tax route applies instead. Mixing the two is a frequent error.
• New means of transport and goods that are not in fact second-hand within the meaning of the scheme.
• Imported goods, where the treatment differs and the scheme is not automatically available.
• Goods acquired as part of a going concern, where the position needs checking against the transfer terms.

The Record-Keeping Conditions

This is where nearly every assessment originates. The scheme requires, in substance:

• A stock book in the prescribed form, recording each item’s purchase and sale with the required particulars, cross-referenced to the purchase and sales invoices.
• Purchase invoices for each item, including from private sellers, showing the seller’s name and address and a description sufficient to identify the goods.
• Sales invoices in the prescribed form, which must not show VAT separately.
• Item-by-item accounting. The margin is calculated per item; a global loss on one item cannot generally be set against a profit on another except under the global accounting scheme, which is available only for lower-value goods and has its own conditions.

HMRC visits typically test a sample. A stock book that is incomplete, reconstructed after the event, or missing the seller’s details on private purchases is the standard trigger.

Challenging a Margin Scheme Assessment

An assessment denying the scheme is a VAT assessment like any other, and the ordinary protections apply.

• Best judgment. Where the assessment is extrapolated from a sample, the exercise must satisfy Van Boeckel: HMRC must make a fair and honest use of the material available, not simply pick a figure. See also Pegasus Birds on how the tribunal should approach a flawed assessment.
• Time limits. The one-year evidence-of-facts rule and the four-year cap both apply, and HMRC’s assessment date should be tested against them.
• Substance over form. Where the records are imperfect but the transactions are demonstrably genuine and the margin is capable of being established from other evidence, that is a proportionality argument worth running, a technical breach that causes no loss of tax should not produce a windfall assessment. It is not a guaranteed answer, but it changes the negotiation.
• Reconstruct the margin. Bank records, trade platform data, auction records and DVLA data can frequently establish actual purchase and sale prices even where the stock book failed. Doing that work before the review deadline is usually the single most effective step.
• The penalty. A record-keeping failure is characteristically careless, not deliberate. Argue the behaviour under Schedule 24, then suspension with record-keeping conditions, which is exactly the sort of case suspension exists for.

Practitioner Application

1. Audit the stock book before HMRC does. The cost of fixing it is trivial compared with the assessment that follows from not fixing it.
2. Get seller details on every private purchase at the point of purchase. They cannot be obtained afterwards.
3. Never show VAT separately on a margin scheme sales invoice. It invalidates the treatment and can create a liability for the VAT shown.
4. Keep scheme and non-scheme stock strictly separate, because mixed treatment is what turns a small problem into a whole-period assessment.
5. On assessment, rebuild the actual margins from third-party data and attack the extrapolation, rather than arguing about the records in the abstract.
6. Seek suspension of the penalty with specific record-keeping conditions.

Frequently Asked Questions