Do I charge VAT on second-hand phones?

• The Margin Scheme taxes the difference between what you paid and what you sold for, not the selling price.
• It only applies to goods you bought without VAT being charged to you.
• You cannot reclaim VAT on the purchase of a margin scheme item — there was none to reclaim.
• A margin scheme invoice must not show VAT as a separate amount.
• It is optional per item. You can use it on some handsets and not others.

Why second-hand phones are treated differently

When you buy a handset from a member of the public, they are not VAT registered and no VAT is charged to you. If you then had to charge VAT on the full resale price, the same phone would effectively be taxed again every time it changed hands — which is what the Margin Scheme exists to prevent.

So instead of VAT on the sale price, you account for VAT on the margin: the difference between what you paid and what you sold it for. HMRC sets out the rules in VAT Notice 718 and the second-hand goods notice that sits under it.

Working out what you owe

The VAT is inside the margin, not added to it. At a 20% rate the VAT element of any gross amount is one sixth, so a handset bought for £180 and sold for £240 has a £60 margin, of which £10 is VAT.

If you sell at or below what you paid, the margin is nil or negative and there is no VAT to pay on that item. You cannot offset a loss on one handset against the margin on another — each item stands alone.

When you cannot use it

• The handset was bought from a VAT-registered business that charged you VAT on it — you reclaim that VAT and sell under normal rules instead.
• You cannot evidence what you paid. No purchase record, no margin scheme.
• The item is not eligible second-hand goods — a brand new handset bought from a distributor is normal-rate stock, not margin scheme stock.

What this means at the counter

The practical difficulty is that the two kinds of stock look identical on the shelf. A used iPhone taken in part exchange and a used iPhone bought from a trade supplier with a VAT invoice are the same phone, but they are taxed under different rules and need different invoices.

That is why the purchase price has to stay attached to the individual handset rather than being averaged across a model. Mobile POS tracks each unit by IMEI with its own cost and VAT treatment, so the correct rule follows the phone through to the sale.