Margin schemes are very effective at keeping down VAT costs. From 2021, this efficiency will be lost for transactions involving the EU. Although certain steps can help reduce the impact, margin schemes will become somewhat less effective for these international purchases.
They work by only requiring VAT to be accounted for on the margin between sales and costs, rather than on the full sales price. This is a large saving when the purchase is from someone who does not charge VAT (eg a private collector), as the comparison below shows.
| 2020: margin scheme, bought from collector | 2020: non-margin scheme, bought from business |
| Purchase £12,000 (net) | Purchase £12,000 (net) |
| VAT £nil | VAT £2,400 |
| VAT recovered on purchase: none permitted | VAT recovered on purchase: £2,400 |
| Sale £24,000 (gross) | Sale £24,000 (gross) |
| VAT £2,000 (paid to HMRC) | VAT £4,000 (paid to HMRC) |
| Profit £10,000 | Profit £8,000 |
| 25% more profitable | 25% less profitable |
Currently the margin schemes are also effective when the goods are purchased from EU sellers, but this will no longer be the case when GB leaves the EU at 11pm on 31 December 2020. The VAT risk is that the GB purchaser (different rules will apply to Northern Ireland) will be required to account for UK VAT on the purchase as an import at the standard rate, which would disqualify the purchaser from applying the margin scheme rules at all, resulting in lower profits (see above examples).
There is a solution to this, but the VAT savings are reduced and the terms apply more tightly than before Brexit.
For more information or to discuss any queries, please contact us and we would be happy to assist.
