Run a jewellery business and the books behave differently from almost any other shop. Your stock is small, high-value and easy to mis-count. A lot of what you buy is second-hand, which changes how VAT works. And the insurance bill that protects all that stock has its own accounting quirks.
Get those three things right and your accounts tell the truth, your VAT bill is as low as it legally should be, and you're covered if the worst happens. Get them wrong and you can overpay VAT on every sale, overstate your stock, or find a claim disputed.
This guide is for UK jewellers, watch dealers and second-hand specialists who sell to the public. We'll walk through stock valuation, the VAT margin scheme on pre-owned pieces, and how to handle insurance in your books. Figures quoted are for the 2025/26 tax year.
How should a jeweller value stock?
Stock is usually the biggest number on a jeweller's balance sheet, so the basis you value it on matters.
UK accounting standards and HMRC both require you to value stock at the lower of cost and net realisable value. You compare the two figures for each item (or each sensible group of items) and use whichever is lower. That stops you overstating stock you'd struggle to sell at full price.
Cost isn't just the price on the supplier invoice. Per HMRC's Business Income Manual, cost is all the costs of bringing the item to its present location and condition. For a jeweller that can include:
- The purchase price of the piece or the raw gold, silver and stones.
- Incidental costs of acquisition, such as carriage or import duty.
- For pieces you make or remodel, the directly attributable labour and a fair share of workshop overheads.
Net realisable value (NRV) is the price you expect to sell for in the ordinary course of business, less any costs still needed to finish and sell the item. If a ring cost you £400 to make but the design has dated and you'll only get £350 for it after a £20 polish, its NRV is £330, and that's the figure that goes in your stock.
In practice, the mistake we see most often is valuing every piece at a hopeful retail price rather than cost. Stock is an asset, not a sales forecast. Value it conservatively, count it physically at year end, and keep the count reconciled to your stock book line by line. With small, high-value items, a single mislaid ring distorts the numbers fast.
What is the VAT margin scheme and can jewellers use it?
If you're VAT-registered and you buy second-hand jewellery from private individuals, you face a problem under normal VAT rules: you can't reclaim VAT on the purchase (the seller didn't charge any), but you'd have to charge VAT on the full resale price. That's punishing.
The VAT margin scheme fixes this. Instead of charging VAT on the whole selling price, you only account for VAT on your margin, the difference between what you paid for an item and what you sold it for. You pay VAT at one-sixth (16.67%) of that margin, as set out in HMRC's VAT margin schemes guidance.
Second-hand jewellery and watches are exactly what the scheme is designed for. It's optional, item by item, and you don't need to apply or register separately to use it. You just have to follow the rules and keep the right records.
A few points worth knowing:
- You can't reclaim VAT on a margin-scheme purchase, and you can't show VAT separately on the sales invoice.
- If you sell an item for less than you paid, there's no negative VAT. The margin is simply nil for that item.
- Repairs, parts and business overheads stay outside the scheme. You reclaim VAT on those the normal way.
What can't go through the margin scheme?
This is where jewellers trip up, because the exclusions hit the heart of the trade.
The margin scheme cannot be used for investment gold, precious metals or precious stones. So a loose diamond or a bar of bullion doesn't qualify. A finished second-hand ring, set with that diamond, generally does, because you're selling eligible second-hand goods rather than the stone alone.
Investment gold has its own VAT treatment. Per HMRC's gold VAT notice, investment gold (broadly, bars of at least 995 thousandths purity in accepted bullion weights, and certain coins) is exempt from VAT rather than standard-rated. That's a different regime again, and mixing it up with the margin scheme is a common and costly error.
So the practical sorting rule for a jeweller is:
| What you're selling | VAT treatment |
|---|---|
| New jewellery (bought with a VAT invoice) | Standard rate 20% on full price; reclaim input VAT |
| Second-hand jewellery bought from a private seller | Margin scheme available: 16.67% on the margin |
| A loose diamond or other precious stone on its own | Standard rated; margin scheme not allowed |
| Investment gold (qualifying bars/coins) | VAT exempt |
If a transaction doesn't clearly fit a row, that's a good prompt to check before you invoice, not after.
Worked example: margin scheme vs standard VAT
Illustrative example. Aisha runs a VAT-registered jewellery shop. She buys a second-hand 18-carat gold ring from a member of the public for £900 and sells it for £1,500.
Under the margin scheme:
- Margin = £1,500 - £900 = £600
- VAT due = £600 x 1/6 = £100
- Aisha keeps £500 of margin after VAT
If she had to apply standard VAT on the full selling price instead (because, say, she failed to keep the right records and lost the scheme on that item):
- VAT due = £1,500 x 1/6 = £250
- She keeps £350 of margin after VAT
On this one ring, the margin scheme saves £150 of VAT. Across a year of second-hand sales that difference is the gap between a healthy margin and a thin one. The standard rate used here is 20%, confirmed on gov.uk; £250 is the VAT element of a £1,500 VAT-inclusive price (one-sixth).
What records does the margin scheme need?
The scheme's savings come with a paperwork condition, and HMRC enforces it strictly. Lose the records and you lose the scheme on that item, which drops you back to VAT on the full selling price.
You must keep the usual VAT records plus a dedicated stock book, with HMRC's record-keeping rules requiring an entry for every item bought and sold under the scheme.
For each purchase, record:
- A unique stock number
- The purchase date and invoice number
- The purchase price
- The seller's name and a description of the item
For each sale, record:
- The same stock number
- The sale date and sales invoice number
- The selling price
- The buyer's name, the margin, and the VAT due (at one-sixth)
Keep VAT records for at least six years. With margin-scheme stock that's sat unsold beyond six years, hold the purchase paperwork until the item finally sells, otherwise you can't use the scheme on it. For a high-value, slow-moving piece, that retention point catches people out.
Because each item is tracked individually, a tidy stock book does double duty: it's both your VAT evidence and your stock valuation working. Good bookkeeping here pays for itself.
How do you account for jewellery business insurance?
Stock insurance is usually one of a jeweller's largest fixed costs, and it has two sides in the books.
The premium is a normal allowable business expense. Put it through the profit and loss account. If you pay annually but the cover straddles your year end, spread it: the portion of the premium covering next year is a prepayment, carried on the balance sheet and released as the cover is used. That keeps each year's profit accurate.
A claim payout is the part people get wrong. If stock is stolen or damaged and the insurer pays out, the receipt isn't tax-free windfall, it's usually taxable income that replaces the lost stock or the profit you'd have made. The accounting mirror is that you write the lost stock out of your books. Net it correctly and you're not taxed twice, but you can't simply pocket the cheque and ignore it.
A few practical points:
- Keep your insurance valuation and your accounting stock valuation reconcilable. They serve different purposes (replacement value versus lower of cost and NRV), but a big unexplained gap invites questions from both your insurer and HMRC.
- VAT on the premium follows the policy; insurance is generally exempt from VAT, so there's usually no input VAT to reclaim on the premium itself.
- If a claim relates to a capital asset (say, a display safe) rather than trading stock, the tax treatment differs again and is worth checking.
This is exactly the kind of area where a quick conversation with a tax adviser saves a mess at year end.
Should a jeweller register for VAT?
You must register for VAT once your taxable turnover passes the registration threshold of £90,000 in any rolling 12-month period, per gov.uk. You can also register voluntarily below that.
For a jeweller, the margin scheme changes the maths. Your taxable turnover for the threshold test is based on your sales, not just your margins, so a busy second-hand dealer can cross £90,000 sooner than the profit suggests. Watch the rolling figure, not just the year-to-date.
Selling online as well as in-store? Marketplace and platform sales count too, and the VAT picture for ecommerce sellers adds its own wrinkles around place of supply and marketplace VAT collection.
Frequently asked questions
Can I use the VAT margin scheme on a second-hand diamond ring?
Yes. A finished second-hand ring is eligible second-hand goods, even though it contains a diamond. What you can't put through the scheme is a loose precious stone or investment gold sold on its own. Those are excluded under HMRC's margin scheme eligibility rules.
What VAT rate applies under the margin scheme?
You pay VAT at one-sixth, which is 16.67%, of your margin (selling price minus purchase price). You don't charge VAT on the full selling price and you can't show VAT separately on the invoice.
How should I value unsold jewellery stock at year end?
Value it at the lower of cost and net realisable value, item by item. Cost includes the purchase price plus costs of bringing it to its current condition; net realisable value is the expected selling price less any costs to finish and sell it.
Is an insurance payout for stolen stock taxable?
Usually yes. A payout that replaces trading stock or lost trading profit is normally taxable income, and you write the lost stock out of your accounts at the same time. It isn't a tax-free windfall, so it needs to be recorded properly.
Do I need a separate stock book for margin scheme sales?
Yes. HMRC requires a stock book recording each item's stock number, purchase and sale details, the margin and the VAT due. Without those records you lose the scheme on that item and pay VAT on the full selling price.
Talk to an accountant who understands the jewellery trade
Stock, margin VAT and insurance are where jewellers most often overpay or slip up. If you'd like your stock book, VAT scheme and year-end accounts handled by people who get the trade, the team at Zmartly can help. Book a free 20-minute call through our jewellers accounting page and we'll talk through your numbers.
