Tax Guides

Industry Specific VAT Schemes

Industry Specific VAT Schemes

May 27, 2022

Choosing the right VAT scheme is important for your business, but did you know that if you work in certain industries, there are industry specific VAT schemes that are designed to help you? Industry specific VAT schemes which are targeted at different sectors will often let you calculate VAT using different methods other than the standard and common VAT schemes to your benefit so it’s well worthwhile exploring your options.

VAT margin scheme

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The VAT margin scheme is one that is aimed towards specific sectors that sell second-hand goods. It was introduced as HMRC recognised that the standard VAT scheme could unfairly impact those businesses which often purchase goods from private individuals that do not charge VAT and therefore would have no VAT to reclaim. These second-hand businesses are affected because it means they would potentially have to suffer a smaller margin in order to resell the goods as they need to charge VAT on top of their sale price making it less attractive to customers.

To remedy the disadvantage, the VAT margin scheme allows second-hand businesses to calculate VAT by applying a fixed rate of 16.67% on the difference between the price you pay for goods and the price you resell it for. For example, if you paid £500 for an antique chair and sell it for £750, you would calculate 16.67% on the £250 difference. You would therefore need to pay £41.68 in VAT to HMRC on the sale.

The VAT margin scheme can therefore be far more beneficial for second-hand businesses when compared to the standard rate scheme. If the seller bought an antique chair for £500 and wanted to charge £750 when reselling it, they would have to add 20% on top to include standard rate VAT. This would bring the chair’s total cost to £900 which may make it much harder to sell to customers. Alternatively, the seller could reduce the cost when reselling the chair to £625 which would mean that the final cost of the chair with VAT is £750, however their profit margin would only be £125. Under the VAT margin scheme, the seller would make £208.32 in profit as they only need to pay £41.68 in VAT on £250 profit.

You can only use the VAT margin scheme if you are VAT registered and buy and sell goods such as antiques and collectibles, works of art, or second-hand goods which can still be used such as refurbished laptops or upcycled furniture. You do not need to apply to use this scheme and can start using it at any time so long as you keep the correct records, are accounting for your VAT correctly and report it accurately on your VAT return. You cannot use the VAT margin scheme if you are buying and selling goods that you were charged VAT on, precious metals such as gold for investment (so this may exclude gold in jewellery) or precious stones. 

Furthermore, the VAT margin scheme provides the added benefit where the good is sold for less than it is purchased for, then there is no VAT to be paid at all. However, some may find that the record keeping can be more onerous as you will need to include the date you bought your item, the name of the person who sold it to you and the price you sold it for. In most instances, this information can be found on invoices, but if you are buying second-hand goods from a private individual who is not running a business then this may not be available, and you will have to keep your own records.

VAT retail scheme

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The VAT retail scheme helps businesses that sell a high volume of goods at different VAT rates (20% standard VAT rate, 5% reduced VAT rate and zero VAT rate) by allowing them to calculate the VAT due for a VAT period in one single calculation as opposed to calculating VAT for each individual sale at the appropriate VAT rate. To do this, you can use one of the three methods that suits your business best –

  • Point of Sale Scheme

You can only use this method where you can readily identify the appropriate VAT rate at the point of sale. This is usually the case for those businesses that use an electronic till that is able to record the VAT automatically. To use this method you need to total all the sales of goods which attract the standard 20% VAT rate and divide by 6, then total all the sales of goods which attract the reduce 5% VAT rate and divide by 21. The total of these two figures is the amount due to HMRC.

As an example, you sell £24,000 worth of goods at the standard VAT rate. This divided by 6 equals £4,000. You also sell £10,500 worth of goods at the reduced VAT rate. This divided by 21 equals £500. The total VAT due to HMRC is therefore £4,500.

  • Apportionment Scheme

You can only use this method where you buy goods for resale and do not use the VAT margin scheme or flat rate scheme. Your annual turnover excluding VAT cannot be more than £1 million. To calculate your VAT you need to total up the value of goods you purchased for resale in each VAT rate group. Then divide each total by the entire sum of all your purchases together. Multiply each outcome by your total sales and then divide by 6 for standard VAT rate goods and by 21 for reduced VAT rate goods.

As an example, you purchase £12,000 worth of standard VAT rate goods, £6,000 worth of reduced VAT rate goods and £2,000 worth of zero VAT rate goods. The total amount you have spent on purchases is £20,000. You sell all these goods for a total of £28,000. You need to divide £12,000 by £20,000, multiply by £28,000 and then divide by 6 which is £2,800. You then need to divide £6,000 by £20,000, multiply by £28,000 and then divide by 21 which is £400. The total amount of VAT to be paid is £3,200.

  • Direct Calculation Scheme

You may prefer to use this scheme where you sell a clear majority of goods in one VAT group and a small minority of goods in another VAT group. You can only use this scheme where your annual turnover excluding VAT is less than £1 million.

To calculate your VAT payment due, you will first need to determine your expected selling prices (ESP) for your minority goods (where using the ESP for your majority goods would lead to a reasonable VAT calculation this can be permitted by HMRC, however the most common method of this calculation is to calculate the ESP on minority goods). You then need to total the ESP for the minority VAT group(s).

If your goods are standard rated then you need to divide the total ESP for standard rated goods by 6. If you have zero rated goods, you need to deduct your ESP for zero rated goods from your actual total sales for the VAT period you are reporting first, and then whatever is remaining gives you your standard rated goods which must be divided by 6.

If your goods are reduced rate then you need to deduct the total ESP for your reduce rate goods from your actual total sales for the VAT period you are reporting first, and then divide by 21. The remaining amount will give you your standard rated goods which must be divided by 6. The two amounts then need to be added together for the final VAT payment due.

As an example, your total sales for the VAT period you are reporting is £25,000. Your ESP of zero rated goods is £2,500. Your ESP of reduced rate goods is £105. You deduct £2,500 and £105 from your total sales of £25,000 which leaves £22,395. This is the amount of goods sold at the standard rate which needs to be divided by 6. The amount of VAT to be paid on standard rated goods is therefore £3,732.50. Finally divide your ESP for reduced rate goods by 21 which is £5. Add both totals together for your final VAT payment due which is £3,737.50.

For all VAT retail schemes above, you can continue to use whichever method you like even where your turnover is over the threshold limit but must agree a bespoke retail scheme with HMRC. You can join these schemes at the beginning of any VAT period and do not need to apply with HMRC. You cannot use these schemes if your business is in catering, pharmacy or floristry as there are separate rules specific for your industry.

Capital Goods Scheme

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The capital goods scheme can be the most suitable for you if your business purchases or builds capital goods that are used in the business and incur VAT. As capital goods can be used for a number of years, often it means that the taxable usage of the asset will change over the time, and so therefore the capital goods scheme aims to fairly attribute VAT over a set period of time.

Capital goods are items such as land, buildings, civil engineering works, construction of buildings or civil engineering works, and also the refurbishing, altering or extension of buildings and civil engineering works which costs £250,000 or more (excluding VAT). They are also computers or computer equipment where the individual item costs £50,000 or more (excluding VAT). Capital goods under this scheme also includes items such as aircraft, ships, boats and other vessels, as well as the construction and refurbishments of these items that cost £50,000 or more (excluding VAT).

You cannot use the capital goods scheme where you are acquiring these capital items simply to resell them. Similarly, you cannot use this scheme where you spend money on the assets such as to refurbish or alter them for the sole purpose of reselling them. Finally, you cannot use this scheme where you acquire capital goods which are used for non-business purposes.

The capital goods scheme works but allowing you to reclaim a fair proportion of VAT paid when purchasing an asset depending on the percentage of the asset that is used to provide a taxable supply. For buildings and land, the period of time within the scope of the scheme is 10 years and for all other qualifying assets it is 5 years. Businesses will need to review the use of their assets over this period and adjust their VAT by repaying HMRC if there is less use or claiming additional VAT if there is more use.

For example, your business purchases a commercial building for £1 million. The VAT on the building is standard rate at 20% and so the total price is £1.2 million. You only use 70% of the building to provide taxable supplies and so 70% of the VAT is immediately recoverable upon purchase (£140,000). If you continue to use 70% of the building to provide taxable supplies over the next 10 years, no adjustment needs to be made.

However, if your position changes after the first year and you find that you only use 60% of the building for taxable supplies then an adjustment must be made. To do this, you would divide the original VAT claim of £140,000 by 10 (the full amount of years considered under the scheme) which is £14,000. You next calculate 60% of the original total VAT of £200,000 which is £120,000 and also divide by 10. The difference between the two amounts is what must be repaid to HMRC and in this case would be £2,000. You would subsequently repay £2,000 for every year you continue to use 60% of the building to provide taxable supplies. You need to review your position every year. Conversely, if you increase the usage of your building for taxable supplies, you would use the same method to calculate additional VAT that you can claim from HMRC.

Get help with industry specific VAT schemes

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Get help with industry specific VAT schemes

If you’re finding it difficult to complete your VAT returns, then get help with expert advice on how to use industry specific VAT schemes. Or you can find out more about the commonly used VAT schemes for small to medium sized businesses. If you’re working in the construction industry, then you can also find out about the VAT reverse charge.  Simply get in touch to book in for a free consultation to discuss what you would like help with.

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