The rules of VAT are fairly simple. You can reclaim VAT you pay on goods or services you buy for your business and charge your customer VAT when you sell them. But how should you handle VAT where you buy or sell second-hand goods? VAT expert John Craig explains.
You may have heard of VAT margin schemes that can be used by businesses if they frequently trade in second-hand goods, e.g. antiques, art, cars, boats and even horses. However, you might not be aware that even where you occasionally buy or sell second-hand goods you too could use a margin scheme.
As the name suggests, margin schemes apply VAT on the difference between the price you pay for items and the amount you sell them for, the margin. If you don’t usually trade in second-hand goods, the margin scheme will typically be relevant when you buy used machinery, vans, cars, office equipment and furnishings and then sell them.
The general margin scheme doesn’t apply to items you buy new, e.g. office furniture, and sell after it’s been used in your business. It only applies to goods that are bought and sold in second-hand condition.
Which purchases qualify?
Usually, purchases to which you can apply the margin scheme are goods bought from:
• A private individual
• A dealer in second-hand items
• Another business where it bought the item in a used condition before selling it to you and it applied the margin scheme.
However, where you intend to use the margin scheme you must not reclaim VAT on the item you purchase.
Can the margin scheme save VAT?
If you buy a second-hand item from another VAT registered business and they don’t issue you with a VAT receipt or invoice, it’s probably because they’ve used a margin scheme. Check with the seller and if that’s the case there’s a VAT-saving measure you can use.
Ask the seller to change the sale so that it’s outside the margin scheme. They shouldn’t object as it won’t affect them adversely and usually gives them a cash-flow advantage. From your point of view, while it initially increases the total price, after you’ve reclaimed the VAT the cost will be less.
A dealer buys a second-hand truck for £15,000. He marks it up by £3,000 and offers it to you for £18,600 (that’s £15,000 + (£3,000 + 20% VAT). If you buy it at that price you won’t be entitled to reclaim any VAT so the net cost to you is £18,600. Instead, if you ask him to sell the truck to you outside the margin scheme, he’ll add VAT to the full price, making its cost £21,600. The good news is that you can reclaim the £3,600 charged by the dealer making the net cost £18,000 instead of £18,600. Saving you £600.
If you sell an item you bought second hand and on which you weren’t entitled to reclaim VAT, you can sell it using the VAT margin scheme. That means if you sell it for less than you paid for it you don’t have to charge VAT. But if you sell it for more than it cost, you must add VAT on the margin only. See how this is done in the example above and account for it to HMRC. In both situations you must not issue the buyer with a VAT invoice.
If you buy second-hand goods from private individuals or businesses that have used a margin scheme you can’t reclaim VAT. In the latter case, ask the seller to sell to disapply the margin scheme. While this increases the cost, after reclaiming the VAT you’ll be better off.
For further information about VAT and related services please do contact our team.