The VAT margin scheme on Shopify
Shopify works out VAT on the whole price. Under the margin scheme you only owe VAT on your profit. Here’s how to set your store up properly, one step at a time, in plain English.
A camera you bought for £400 and sold for £500
| VAT Shopify reports on its own£500 ÷ 6, as if VAT were due on the whole price | £83.33 |
| VAT you actually oweonly on your £100 profit: £100 ÷ 6 | £16.67 |
Pay on Shopify’s figure and you’d hand HMRC £66.66 too much on this one sale.
Six steps to a margin scheme store
Make your prices include VAT
Margin scheme prices are always VAT-inclusive: the VAT is inside the price, never added at checkout. In Shopify, go to Settings → Taxes and duties and turn on “Include sales tax in product price and shipping rate”. If VAT was being added at checkout until now, check your prices first.
Group your margin scheme goods
Add a tag such as margin-scheme to every second-hand product, then create an automatic collection with the rule “product tag is margin-scheme”. The collection keeps itself up to date, and you don’t need to show it in your shop.
Add a 0% tax override for that collection
Go to Settings → Taxes and duties → United Kingdom. Under Tax overrides, add a product override for your margin goods collection at 0%. Shopify then stops reporting VAT on the whole price of those goods. Your prices don’t change, and new goods you sell keep normal VAT.
This doesn’t mean you pay no VAT. You still owe VAT on your margin. Shopify just stops counting it the wrong way, so you can work it out properly in steps 4 to 6.
Keep a stock book
HMRC asks margin scheme sellers to record every item: what you paid, when and who from, and, when it sells, the price, the buyer and the VAT on the margin. Our free stock book template has every column and works out the VAT for you.
Give each buyer a margin scheme invoice
A margin scheme invoice must show the scheme wording, such as “margin scheme - second hand goods”, and must not show VAT separately. Shopify’s standard order emails and invoices don’t do this for you. Our free invoice template makes one that ticks every box.
Add the VAT on your margins to each VAT return
At the end of each VAT period, total the VAT on your margins and add it to box 1, alongside VAT on anything else you sell. If you refund a margin scheme sale, the VAT on it comes off in the period of the refund. The margin scheme calculator shows the working for any single sale.
Or let MarginVAT do steps 2, 4, 5 and 6 for you.
MarginVAT is a Shopify app that tags and groups your margin goods, keeps your stock book, sends the right invoice with every sale, handles refunds with credit notes and gives you the figures for your VAT return, with the working. It explains every change before it makes it.
Shopify and the margin scheme
Can Shopify handle the margin scheme on its own?
Not fully. Shopify’s tax settings apply a rate to the selling price, and there’s no setting for VAT on your profit. That’s why you group your margin goods, set them to 0% in Shopify, and work out the margin VAT yourself, or with an app.
Will my customers see different prices?
No. Your prices already include VAT, and the 0% override only changes what Shopify reports, not what customers pay.
I sell new goods as well. What happens to them?
Nothing changes. They keep normal VAT. The override only applies to products in your margin goods collection.
Do I need to tell HMRC I’m using the margin scheme?
No. HMRC says you don’t have to register: you start using it by keeping the right records and reporting it on your VAT return. It can’t be used for any item you were charged VAT on when you bought it.
This guide is general information, based on HMRC’s guidance on the VAT margin schemes. It isn’t tax advice.