Buying and selling second-hand goods is a huge market, both for individuals looking to make a quick quid on unwanted items, and businesses whose entire profit model is built around selling second-hand items.
But where does VAT come into this? If you sell second-hand goods as a business, do you still need to pay VAT? And what amounts to ‘a business’ for VAT purposes?
In short, the VAT threshold still applies to businesses who are selling second-hand goods. You must register for VAT if your business VAT taxable turnover exceeds the £85,000 threshold, whether you are selling through a website like eBay, in-store, or on your own eCommerce platform. VAT taxable turnover refers to the total value of everything sold (including delivery costs), excluding items which are VAT exempt.
There is no simple definition of being a “business”, and numerous cases have gone through the courts over whether an individual or organisation was in business. With second-hand goods, regular purchases and sales would potentially indicate a business, e.g. buying items at car boot sales to sell on eBay.
When a business is VAT registered, they must include VAT at the standard rate of 20% unless a lower rate of VAT applies to the product, or if they use a VAT margin scheme.
What is the VAT margin scheme?
VAT margin schemes alter the amount of VAT paid on certain second-hand goods. Rather than the full selling price, the VAT margin scheme taxes the difference between what you originally paid for an item and what the resale price was. This VAT is paid at 16.67%, or one sixth, on the difference.
The VAT margin scheme allows you to reduce the amount of VAT payable when selling certain goods on which you were unable to reclaim VAT after the initial purchase. The scheme means you would not have to account for VAT in the full selling price of these items.
This also means if you sell a second-hand item for less than your original purchase price, you will not have any VAT to account for.
Are you eligible for the VAT margin scheme?
Below is a list of items which the VAT margin scheme can be used for, and some commonly sold second-hand goods for which it cannot be used.
|VAT margin scheme can be used for||VAT margin scheme cannot be used for|
|Second-hand goods||Any item that you bought which included VAT|
|Works of art||Precious metals|
|Collectors’ items||Precious stones|
What goods are eligible for the VAT margin scheme?
Antiques and collector’s items are naturally a point of contention.
Collectors’ items are defined in the law, and summarised by the Government as “stamps, coins and currency and other pieces of scientific, historical or archaeological interest.” This means there is some grey area, and not all items that can be collected qualify as collectibles for the VAT margin scheme.
Similarly, to qualify as an “antique” in this context, an item must be at least 100 years old.
To be able to use the VAT margin scheme, records must be kept of the cost of each individual item so that the margin can be calculated when it is sold.
Eligible acquisition of second-hand goods
To qualify for the VAT margin scheme, you must have acquired the goods for sale in circumstances where VAT cannot be reclaimed. The two most common examples of this in practice are:
- Purchasing goods from a private individual or an unregistered business which is exempt from VAT, such as a casual seller or trade-in customer.
- Purchasing goods from a business who are themselves selling through a VAT margin scheme.
You can read about all the specific conditions on the UK government website. If your business doesn’t meet all of these conditions, it will not be eligible for the VAT margin scheme.
Do you need to register for VAT margin scheme?
Businesses eligible for the VAT margin scheme must be registered to pay VAT; however, there is no separate registration required for the VAT margin scheme. Providing you meet the conditions set out above and on the Government website, you can use it in your VAT returns.
How to calculate your VAT margin
To calculate your VAT margin, you must work out the difference between the amount you paid for the item initially and the amount you sold it on for. This is not the same as your profit margin, as any additional costs associated with the second-hand sale (such as repairs or refurbishment of a piece of second-hand hardware prior to your sale) must be excluded.
VAT margin example
A company buys a used laptop computer for £300 and invests £200 in upgrades/repairs, before selling it to a customer for £800. The margin here is £500 (£800 second-hand price - £300 initial purchase). The upgrade/repair cost is excluded.
The VAT payable is therefore 16.67% of £500, or £83.33.
Incidental costs that are charged to the customer, such as postage and packaging, are included in the sale price.
Get expert VAT advice today
If your business is required to register for VAT and makes money by selling second-hand goods, you may be able to take advantage of the VAT margin scheme. If you would like more information on how this works, tailored to your business, get in touch with the Shorts VAT team today.