Save content
Have you found this content useful? Use the button above to save it to your profile.
Puppy
istock_Laures

VAT: Puppies were not second hand goods

by
3rd May 2017
Save content
Have you found this content useful? Use the button above to save it to your profile.

Neil Warren considers a case in which the taxpayer claimed the puppies it bought from a non-VAT registered breeder were eligible for the second-hand goods scheme.

Background 

The second hand margin scheme is a concession to businesses that significantly reduces their VAT payments compared to normal VAT accounting. It means a business only accounts for output tax on its profit margin, rather than the full sales value. The record keeping requirements are very strict and some sections of VAT Notice 718: The Margin Scheme and global accounting have the force of law.

The case

The taxpayer in this case was Little Rascals Pets Ltd (TC5811), which trades in puppies, some of which it breeds on its premises, and others it acquires from suppliers for onward sale.

The company accepted that it should account for output tax on the full selling price of puppies it had home-bred, and also those that it had purchased from VAT registered suppliers where the supplier had charged VAT. However, it felt that puppies bought from non-VAT registered suppliers should only be subject to VAT on the profit it made when the puppies were resold, i.e. within the scope of the margin scheme for second hand goods.

Key issue

The question before the tribunal was simple: could puppies bought from breeders be classed as second hand goods? HMRC obviously thought the puppies did not qualify as second hand goods and gave a written ruling as such in July 2015 (the company started to trade in August 2014) stating that output tax was due on the full selling price.

The facts

The puppies in question were usually about eight weeks old when bought by the taxpayer. The business usually had about 100 puppies on its site, of which around half were from home breeding. The puppies were then given socialisation and toilet training, and were sold when aged between 10 weeks and five months old, but mostly when aged between 12 and 14 weeks. Selling prices ranged between £400 and £1,500 and the buyers were usually private individuals, i.e. non-business customers.

Court findings

The tribunal concluded that for the puppies to qualify as second hand goods, there must have been “prior use” before they were bought by the business. As the breeders had only treated them as stock items prior to their sale, this did not reflect “prior use” of the puppies, for example as a pet.

The tribunal judge commented: “We conclude that, as a matter of principle, animals cannot be second-hand goods at the time they are bought from their breeder.” The judge added: “On the evidence we heard the appellant did not satisfy us that the breeders used the puppies as pets in their first eight weeks of life.”

Conclusion

It is understandable that the company put forward an argument that the puppies should qualify for a second hand scheme. There was no dispute that the puppies qualified as “goods” but the absence of “prior use” by the breeders meant they did not qualify as second hand.

Global accounting

Don’t forget that if second hand goods are bought by a business for £500 or less, VAT can be accounted for using the “global accounting scheme”, where VAT is paid on total sales less total purchases of all goods in a VAT period, rather than on an item by item basis. This means that losses made on items are automatically offset against profits made on other sales. In the case of the non-global scheme, no VAT is payable on items sold at a loss, but the loss cannot be offset against profits on other sales. (VAT Notice 718, sections 14 and 15).

Replies (3)

Please login or register to join the discussion.

avatar
By davidreger
08th May 2017 18:31

Interesting - no VAT is payable on items sold at a loss - rather obvious - the clues in the name - but my EPOS system doesn't appear to acount for that (maybe it is a rather uncommon scenario in retail). It isn't entirely clear how it works when the loss is small.
A recent example buying an item for £23.50 net of VAT and selling it for £27.50 including VAT the EPOS program assumes £4.58 VAT not unreasonably.
£23.50 including VAT is £28.20 so a loss.
Logically if I have already reclaimed £4.70 on the purchase then I should only have to account for £4.00 of VAT on the sale being the difference between £27.50 and 23.50. Is that correct?

Thanks (0)
avatar
By AndrewV12
15th Jun 2017 11:49

Pardon the pun, but I feel the proprietors for Little Rascals Pets Ltd, are Barking mad.

Mind you I love it when individuals create their own tax laws, and would you believe it when they do 100 times out of 100 they pay less or no tax, what was the chances of that.

Thanks (0)
avatar
By annmillerbrent
12th Nov 2017 09:02

I've removed my comment as I found the answer to my questions elsewhere on a law database, thanks

Thanks (0)