If a business buys and sells second-hand goods, they can use one of the second-hand margin schemes so that VAT is only due on the profit margin, not the full selling price.
When using a second-hand scheme there are a number of points that you should remember.
Buying second-hand goods
If you buy second-hand goods from a private individual you will not be charged VAT, for the obvious reason that they are not VAT registered.
However, when you buy second-hand goods from a trader using one of the second-hand margin schemes you will be charged VAT on the profit margin, but as a condition of the scheme you will not be issued with a VAT invoice and you will not be able to recover the VAT you are charged.
Tip:
If you are a VAT registered business you can ask to purchase the item outside the margin scheme, in which case you will be issued with a VAT invoice and will be able to recover the VAT but will be charged VAT on the full sale value.
This can be useful if you are buying, for example, second-hand office furniture or electrical equipment for your business, as it will reduce the cost to you. However, if you are going to resell the goods you will have to charge VAT on the full price, not your profit margin.
What about repair costs?
A common question with businesses operating margin schemes is: what happens if I have to repair goods I’ve bought, for example restoring a second-hand table or repairing the gearbox on a car - can the repair costs be added to the purchase price I paid for the goods to reduce the profit margin and the amount of VAT that is due? HMRC say that you cannot do this; when calculating the profit margin you cannot include any repair costs in your calculation.
Tip:
However, you can claim back the VAT on the costs of the repair, so if you have to fit a car with a new gearbox you can reclaim the VAT on the costs of the replacement parts.
What if I have to scrap a car?
If you buy a car and decide to scrap it rather than resell it, you would normally have to account for VAT on the full value of the spare parts that you sell.
Tip:
However, if the car was eligible for sale under the second-hand car scheme, you can use the global accounting scheme to sell the scrap parts. You must keep the normal commercial documentation to show that the vehicle no longer exists and that the scrap parts are therefore eligible for global accounting. If the vehicle has been entered in the second-hand stock book you close the entry and note that it has been transferred to the global accounting scheme.
Trap:
Any individual part that you sell with a value of more than £500 can’t be used on the scheme and you have to account for VAT on the full selling price.
If you scrap a vehicle that is not eligible for the second-hand car scheme you will have to charge VAT on the full value of the spare parts.
Practical Tip:
If you buy second-hand goods you can take advantage of one of the margin schemes to reduce the amount of VAT due on your sales, but don’t forget that you can’t claim back any VAT on the purchase of the goods even if you have bought them from a VAT registered trader.
