de minimis
Why one sixth?
Under a UK VAT margin scheme, the VAT you owe is one sixth of the margin. Not 20% of the margin. One sixth.
This trips people up the first time they see it because 20% is the standard VAT rate, and it feels like 20% should appear somewhere in the calculation. It does — but only implicitly.
The maths
VAT in the UK is added to a net price: gross = net × 1.20. When the margin you receive already includes VAT (because you bought a second-hand item from someone who couldn't charge you VAT, then sold it to a customer at a margin), you have to extract the VAT component from that gross margin. The fraction that does that is 20 / 120 = 1 / 6.
So if you sell a vehicle for £8,000 that you bought for £6,500, your gross margin is £1,500 and the VAT due to HMRC is £1,500 ÷ 6 = £250.
When the rate isn't 20%
If the standard rate ever changes — as it did in 2008 and 2010 — the fraction changes with it. At 17.5% the fraction was 7/47. At 15% it was 3/23. At 20%, blissfully, it simplifies to 1/6.
Common questions
Why is margin scheme VAT one sixth, not 20%?
Because the margin already includes VAT, so you extract the VAT rather than add it: 20/120 = 1/6. The 20% is in there, just implicitly.
How do you calculate VAT on a margin scheme sale?
Take the gross margin — selling price minus purchase price — and divide by six. Sell a vehicle for £8,000 that cost £6,500, and the £1,500 margin gives £250 of VAT.
Does the 1/6 fraction change if the VAT rate changes?
Yes — it tracks the standard rate. It was 7/47 at 17.5% and 3/23 at 15%; at 20% it simplifies neatly to 1/6.