This article explains the UK margin scheme and how your database will help you to manage Margin Scheme calculations.
How Artlogic helps UK Margin Scheme clients
The UK Margin Scheme for works of art allows participating dealers and galleries to reduce the selling price for eligible works by means of reduced tax. The tax, in this case, is the same 20% rate but it is applied to the profit (the difference between the cost and retail price), not the entire retail price. The tax is added to the retail price as normal to form the 'Selling price' which is the only price disclosed to the customer. The scheme has strict rules about record keeping relating to sourcing and sale of artworks.
The aim of this page is to explain the special functionality that we have created to support pricing, labelling, record keeping, creating invoices and calculations rather than to outline everything you need to do or not do under the legislation. We have consulted widely with our clients and directly with HMRC.
The regulations can be found here: https://www.gov.uk/guidance/the-margin-and-global-accounting-scheme-vat-notice-718
If you have questions you can speak to HMRC directly here: https://www.gov.uk/government/organisations/hm-revenue-customs/contact/vat-enquiries
Margin Scheme database features
The below list explains the specially designed Margin Scheme functions we have created in your database.
- Built-in Margin Scheme tax status to ensure works confirm with the regulations. All artworks available to be sold under the scheme should have this tax status.
- Powerful calculator function. Providing the purchase and additional costs are inserted correctly (for stock items) or your consignment details are set correctly, you can set either a Retail Price or set a more meaningful (round numbered) Selling price. Artlogic will then show you both prices, show your expected profit and the amount of tax that will be due. After the sale, the accounts system will indicate your tax liabilities and indicate what you may owe to a consigner based on either a percentage or a net value calculation. Production costs will also be taken into account in calculating the split with the consignor.
- Any work with the Margin Scheme tax status will always show the Selling prices via lists or private view presentations.
- A special invoice mode for Margin Scheme which:
- Displays special wording required by HMRC on the final invoice that you have entered into the Tax Status value list edit screen. At the time of writing, this is "Margin scheme - Works of Art". If you prefer, you can manually add this to each invoice in the Terms and Conditions.
- Suppresses all mention of tax or retail prices and only shows the Selling price for works of art.
- Enables you to apply and display discounts to a selling price on the invoice and which will adjust all other values and calculations automatically.
- Prevents you mixing Margin Scheme and non-Margin Scheme artworks or sundry items on the same invoice as this is not allowed under the scheme.
What are the rules about invoices?
Margin Scheme invoices must display the selling price of every artwork and the invoice total must either reflect the selling price of a single artwork or show the combined total of multiple Margin Scheme artworks. The invoice is required to describe the transaction as being under the Margin Scheme for works of art.
For this reason, no items can be added to the invoice that are not additional works of art sold under the Margin Scheme. In discussions with HMRC on this topic, they have been 100% clear about what they expect, citing paragraph 4.2 about record keeping and paragraph 5.1 regarding clarity and transparency. Any lack of clarity may mean retrospective penalties if there was to be an inspection.
How your Artlogic database helps
Your database will prevent you from adding sundry items to Margin Scheme invoices to ensure regulatory compliance. It will also alert you if you try and combine Margin Scheme works of art with works of art that are not on the scheme. You will need to make separate invoices for crating, packing, shipping, books, framing, etc. or for works that are liable for standard rate VAT or no VAT in the case of book sales. If you are selling works to a buyer outside the EU, you can change the tax status of the work and sell it on a standard invoice without any tax at whatever price you agree and then add on sundry items such as shipping.
The tax rate for Margin Scheme is 20% as normal.
In the art world, the Retail price is significant if the work is on consignment from an artist as the split of sale proceeds and costs is based upon the Retail price. There is both the need to set an attractive Selling price and also refer to the Retail price.
On the HMRC website, there is an assumption that dealers will ignore Retail price and work out the tax they owe HMRC based on 1/6 (one-sixth) of the difference between the Selling price and the Cost price (i.e. their Gross Margin). To express one-sixth as a decimal is 16.66% which has been mistakenly assumed to be the tax rate.
Sample calculations for Margin Scheme
A work of art that is £1,000 at retail with costs of £500 would have a selling price of £1,100.
- To calculate the Selling Price, add 20% of the Profit to the Retail Price [ (500 x 0.2) + 1,000 = 1,100]
- To find the tax from a Selling Price, calculate one-sixth of the Gross Margin [ (600 x 1) ÷ 6 = 100]
- To get the Retail Price from a Selling Price, calculate five-sixths of the Gross Margin and add this to the cost price [ ((600 x 5) ÷ 6 ) + 500 = 1,000]
A work of art that is £1,000 at retail (regardless of costs) would have a selling price of £1,200.
- For Standard VAT, the Selling Price would be Retail plus 20%, [ 1,000 x 1.2 = 1,200 ]
- To determine the tax element from a £1,200 sale including tax [ (1,200 x 1) ÷ 6 = 200 ]
Artlogic's Margin Scheme calculator
Your Artlogic Database provides for this in the Margin Scheme calculator.
To use your calculator, click the blue 'Margin Scheme calculator' button besides the Selling price of your artwork. This will require you to enter a 'Total purchase price' for the artwork in the Artwork's Financial tab.
The calculator will then offer the correct Selling price, Retail price (ex. tax), Margin (ex. tax), Tax payable, Tax rate and Cost price. Clicking 'Update artwork data' will add the newly calculated values to the artwork record.
The calculator looks like this.
There are different standards of record-keeping for Margin Scheme items and you also need permission from HMRC to account for artworks in this particular way.
Eligible works are:
- Artworks subject to import tax (from outside the EU).
- Artworks sold by the creator or their heirs (artists' studios are often VAT registered so may charge VAT).
- Artworks that you have purchased in the UK, providing that you are keeping records in accordance with the scheme. These would not normally have any VAT on them when you bought them unless it was from an artist or their heirs. However, there are other exceptions and we are not tax experts and we suggest that you use the guidance here https://www.gov.uk/guidance/the-margin-and-global-accounting-scheme-vat-notice-718 or speak to your local tax office.
Dealers or Galleries would need to register to use this scheme with HMRC. At this point the working assumption is that all eligible works will be sold under the scheme. This means that tax cannot be reclaimed on the purchase of eligible works until the VAT quarter in which a work has been sold outside the scheme, (e.g. exported).
Purchase and sale in shares
There is a huge amount of information about this. See chapter 12:
If you sell the work on behalf of a group of owners, you account for all the VAT in the Margin Scheme as if you owned it all. Then issue statements to the other owners and they invoice you. If you sell a share in a work you own or co-own, this is not eligible for the Scheme and VAT must be charged as normal.
Purchase price (inc. tax)
This may have no tax included or shown on the invoice (not VAT registered, sold on Margin Scheme) or there may be VAT. This would also include any import tax on works. This would be the hammer price for eligible works bought at auction.
Should the cost price include the VAT inclusive price that you paid for purchasing works and allowable costs?
A quick read of the website introductory pages - it seemed unclear. So Artlogic rang HMRC and, after a bit of a discussion, they said yes. This is important so please feel free to check what your area VAT team tell you about this.
Here is what we discovered:
Normally, you cannot sell anything on the Margin Scheme if VAT was charged on the invoice. Exceptions to this rule are where you opt to use one of the Margin Schemes for imported works of art, antiques and collectors' items and for works of art obtained from creators or their heirs (see section 10 - The Margin Schemes in particular circumstances: works of art, antiques and collectors' items on which VAT has been charged).