Getting the VAT margin scheme right on used devices
A plain-English walk-through of margin VAT for second-hand phones — what it taxes, why it is one sixth and not 20%, and the mistakes that cost shops the scheme.
If you buy a handset from a member of the public for £180 and sell it for £240, you do not owe VAT on £240. You owe it on the £60 — and not even 20% of the £60.
That is the whole margin scheme in two sentences. The trouble is that almost every part of the sentence has a condition attached, and getting one of them wrong is what turns a £10 VAT bill into a £40 one.
What the scheme actually taxes
The official description is short: VAT margin schemes "tax the difference between what you paid for an item and what you sold it for, rather than the full selling price. You pay VAT at 16.67% (one-sixth) on the difference." (official guidance)
So on that handset:
- Margin: £240 − £180 = £60
- VAT: £60 ÷ 6 = £10.00
- Yours: £50.00
Without the scheme, VAT on the full £240 selling price would be £40.00. That gap is why the scheme exists: you bought the phone from someone who was not VAT registered, so there was no VAT to reclaim on the way in, and charging VAT on the entire sale price would tax value that was never yours.
You can put your own figures through the VAT margin calculator, which shows the working rather than just the answer.
Why one sixth, and not 20%
This is the single most common error, and it always goes the same way — the shop overpays.
The standard rate of VAT used throughout this article is 20% (official guidance) — rates differ by country, so use yours. But 20% is what you add to a price that does not yet include VAT. The margin is not that kind of number. The £60 is money that has already come out of a customer's pocket, so the VAT is already inside it.
To pull VAT out of a VAT-inclusive amount you take one sixth, because 20/120 = 1/6:
| 20% of the margin | One sixth of the margin | |
|---|---|---|
| £60 margin | £12.00 | £10.00 |
| £150 margin | £30.00 | £25.00 |
| £400 margin | £80.00 | £66.67 |
On a shop turning over forty used handsets a month, treating one sixth as 20% is a four-figure annual gift to the tax authority that nobody asked you to make.
The four things that cost shops the scheme
The arithmetic is easy. The conditions are where the money goes.
1. You were charged VAT when you bought it
If the item came to you on an invoice showing a separate VAT amount, it is not eligible for the margin scheme. You reclaim that VAT as input tax and sell the item under normal VAT rules instead.
In practice this is the line between the two halves of a lot of shops' stock: handsets bought from the public go through the margin scheme, and stock bought from a VAT-registered trade supplier generally does not. They cannot be treated the same way, which means the decision has to be recorded per item at the point it arrives — not reconstructed at quarter end.
2. You added the repair cost to the purchase price
This is the one that catches repair shops specifically, because it feels obviously fair. You paid £180 for the phone, then £40 on a screen to make it sellable. Surely your cost is £220?
For the margin scheme, no. The guidance is explicit that you cannot include business overheads, repairs, or parts and accessories in margin calculations (official guidance). The margin is still £60, and the VAT is still £10.00.
What you do instead: where you were charged VAT on that screen, you reclaim it on your VAT return in the normal way. The relief comes back to you through a different door, not by shrinking the margin.
It does change what you keep, of course — £50.00 of margin after VAT, minus £40 of parts, is £10.00 in your pocket. Which is worth knowing before you price the next one.
3. Your invoice showed the VAT
A margin scheme sales invoice shows the total price and must not show VAT separately (official guidance).
This is a paperwork rule with a real cost attached, and tills cause it. A system configured to print a VAT breakdown on every receipt will happily print one on a margin-scheme sale, and that document is then wrong. It is worth actually looking at what your receipts say on a used-device sale rather than assuming.
4. Your records will not support it
The scheme requires a stockbook that tracks each item sold under it individually, plus copies of purchase and sales invoices for all of them (official guidance).
"Individually" is the important word. This is a per-item scheme: the VAT on a sale depends on what that specific handset cost you. Four iPhone 13s bought at four different prices are four different margins, and a single line in a spreadsheet reading "iPhone 13 ×4" cannot tell you any of them.
If the requirements are not met, VAT is due on the full selling price of each item rather than the margin (official guidance). That is the £40 outcome instead of the £10 one — not a penalty, just the scheme not applying.
What happens when you sell at a loss
Sometimes a handset does not move and you take what you can get. If you sell it for less than you paid, there is no margin, so there is nothing to tax on that sale.
What you cannot do is set that loss against the margin on a different item. Under the standard margin scheme each sale stands on its own. A separate arrangement called global accounting works differently and pools the figures, but it is a different scheme with its own conditions — not something you drift into by accident.
One honest caveat on this section: the clearest statement of the loss rule appeared in a notice that was withdrawn on 23 December 2021. It follows from the definition anyway — a sale at or below cost produces no difference to tax — but we would rather flag that than quote a withdrawn notice at you as though it were current guidance.
The part that is actually hard
None of the above is difficult on one sale. Anyone can do £240 − £180 ÷ 6.
It gets hard because the margin scheme is per item, and a shop is not. Stock arrives from three or four different routes, some of it eligible and some not. Handsets sit for weeks. Somebody takes a trade-in on a Saturday. By the time the return is due, the question "what did this specific phone cost us?" needs an answer for every device that left the shop that quarter — and if the answer lives in someone's memory, or in a quantity count that says "iPhone 13 ×4", it is not really an answer.
That is the actual work: keeping a cost against every individual device from the day it arrives to the day it leaves. How a shop does that — spreadsheet, stockbook, or software — matters less than that it does it at all.
General information, not tax advice. Check the published guidance or speak to your accountant about your circumstances. Figures and rules on this page were checked against the published guidance on 4 August 2026.