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arrow_back How to calculate VAT using VAT Margin Scheme and iZettle Fees

in VAT Q&A
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Hello, we are using the VAT margin scheme on our sales of products (memorabilia and art) that fall into the scheme (pay 16.67% on the difference between the purchase and sale price of the item) and looking for advice on how this should be calculated, also taking into consideration the amount received in the bank is lesser the card terminal fees.

We are using Xero for managing our accounts and bookkeeping. From a little research online we have found Xero to be complicated for these calculations.

However, there is a workaround which requires more work but I would like to hear others thoughts on this before we proceed.

For example, a product which qualifies for the VAT margin scheme sells for £260.00 (£260.00 charged on our iZettle card machine)

The amount actually received in the bank is £255.45 because iZettle takes their fee of 1.75% of every transaction and this is taken before the funds reach our bank account. Our bank account shows £255.45 received. No record of the £4.55 iZettle fee as it is charged before we even see the money from this sale.

Based on this sale example above, we have calculated this as follows:

Purchase price of item - £20.00

Sale price of item - £255.45

VAT (using VAT Margin Scheme) should be paid on 16.67% of 235.45 (sale price minus purchase price of item).

VAT payable = £33.64

However, my concern is that the amount on the invoice to the customer is £260.00 but the amount received in the bank account is £255.45.

Do we pay VAT on the amount which is received in the bank account, or the total sale price (money received + izettle fees)?

It doesn’t make sense that we should be liable to pay VAT on the £4.55 iZettle fees when that money never actually comes into our accounts.

Please note, the invoices for customers will not show standard VAT amount breakdown as we are using VAT margin scheme so I am also unsure how this should be shown to customers.

To clarify my questions are as follows:

1. Should we pay VAT on only the amount received in the bank account? – based on the example above, the amount liable for VAT would be £235.45.

2. Should we make a note at the bottom of our invoices to say that we are using VAT margin scheme, therefore standard vat is not applied?
Would we show ZERO vat on the invoices or should it show 16.67%? This is more complicated as you calculate this by working out the margin of sale price minus purchase price – customer should never be able to see our original purchase price of the item sold.

3. If a customer asks for a VAT receipt, how should this be processed?

Thanks for your help and I look forward to the advice anyone can offer on this.

1 Answer

1 vote

The VAT Margin Scheme, can be used when selling second-hand goods, works of art, antiques and collectors’ items, in order to tax the difference between what is paid for an item and what is sold for, rather than the full selling price. VAT is paid at 16.67% (one-sixth) on the difference.

Using a Margin Scheme will reduce the VAT payable on the sales of second-hand goods, works of art, antiques or collectors’ items on which VAT cannot be claimed back when the items are purchased. If an item is sold for less than its purchase price, then no VAT is charged on the sale.

The selling price is the amount you sold the item for, including any incidental costs you have charged to your customers, such as postage and packaging.

To answer your questions:

1) Since VAT under the Margin Scheme should be charged on the difference between the selling price and the purchase price, in this example, VAT should be charged on £240.00 (which is £260.00 less £20.00), thus VAT payable will be £40.00 (which is £240.00 divided by 6).

The amount of £260.00 is your selling price. 

The difference between £260.00 and the £255.45 which you received in your bank, should be accounted for as bank fees/charges. These are finance expenses for your company, but it does not mean that your selling price is lower.

Therefore, the amount liable for VAT would be £240.00.

Your VAT payable will be £40.00.

Your revenue will be £260.00.

Your finance expenses will increase by £4.55.

 

There are strict conditions about invoices set out by HMRC, which must be followed in order to be able to take advantage of the financial benefit of using a Margin Scheme.

2&3) According to HMRC, you must not show VAT separately. On your Sales invoice the item’s total price should be shown. If you include more than one item on the same sales invoice, you must allocate a selling price to each one.

 The information below must always appear on the Sale invoices that you issue: 

  • Your name, address and VAT registration number 
  • The buyer’s name and address 
  • A means of cross-referencing between the sales system and the stock book, for example, the stock book number 
  • Invoice number 
  • Date of transaction 
  • A description of the item 
  • Total price – you must not show VAT separately 
  • A note disclosing one of the following: Margin Scheme – second-hand goods, or Margin Scheme – works of art or Margin Scheme – collectors’ items and antiques
Accounting Guru
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