The Value Added Tax (VAT) second hand goods scheme is a special provision in U.K. tax law which allows retailers selling used (i.e. second-hand) goods to collect and pay VAT only on their own margins rather than on the full price of the good.
The British government’s VAT is one of its largest sources of revenue, after income tax and National Insurance. Its standard rate is 17.5%, charged on both goods and services in a manner similar to consumption taxes in other countries like Canada. There are, however, numerous exceptions and exemptions, including some goods on which there is no VAT (like food) and some goods which qualify for a lower VAT rate of 5% (like gas for residential use). In January 2011, the headline VAT rate is scheduled to rise from 17.5% to 20%.
For sellers of second-hand goods, available, Revenue & Customs has made available a special system known as the VAT margin scheme for second-hand goods. Margin schemes exist to cover situations in which merchants charge VAT while selling goods, but did not have to pay VAT to acquire the goods from producers. Specifically, according to that department, the scheme allows “you to pay VAT on the value you added to the goods, rather than on their full selling price.”
Under the second-hand goods scheme, VAT is calculated only on the difference between the purchase price and sale price. For instance, suppose a seller bought a painting for £1000, and pays no VAT. He then chooses to sell it for £1250. In this case, VAT would only be charged on the difference between the two – £250 – rather than on the full purchase price of £1250.
The margin scheme actually applies to other products than just secondhand goods. According to Revenue & Customs, the same rules also apply to art (paintings, photographs, etc.), antiques, and stamps and coins (when they are considered collectors’ items). Second-hand goods are defined as goods which are either usable or repairable but are not new, and include vehicles sold for operation but not vehicles sold for scrap. Complete information on eligible and ineligible goods can be found in Notice 718, section 20.1. The second-hand goods scheme cannot be used for re-selling gifts, for gold or precious metals, or when a retailer did pay VAT when they acquired the goods in the first place.
In addition, other margin schemes apply for certain other potentially related business activities. For instance, there is an auction margin scheme, a horse and pony sales scheme, and a pawnshop scheme.