VAT or not VAT
Posted on: 29 Nov, 21
That's the question that many businesses getting involved a more circular economy will face. Oury & Clark take a welcome look at some of the jungle of tax related issues.
That’s cos i’m trying to get my head around the circular economy.
I’m not sure that means you have to run around in circles, are you sure you know what it means?
Oh yes, it’s all the rage, and only going to get bigger as people attempt to share, re-use and recycle more goods in order to help solve big global problems like pollution, waste & climate change.
Like second hand clothes? They’ve been around for ages haven’t they, my brother used to get all of my hand-me-downs.
Awkward. We prefer the term pre-loved (or vintage if you’re posh) and even some of the big supermarkets and fashion chains are at it these days.
Sounds great, what's the problem?
It’s the tax man Oury, he keeps clobbering my margin on my collectibles business.
How so?
Take this top hat.
No thanks, it looks too “pre-loved” to me.
As an example. I bought it through the business for £1,500 and i’ve just sold it for £2,000.
So a £500 profit, where’s the problem?
Not quite, it was second hand so I didn’t have to pay VAT on the purchase, but I sold it through the business, so had to pay the VAT. That slashed my profit to £167.
Oh, sweet child of mine, haven’t you heard of the VAT margin scheme?
Yes, no, you tell me about it first so i can check.
The VAT margin scheme. It was introduced for businesses that sell second hand goods, works of art, or smelly used rockstars hats that they’ve done god knows what in otherwise referred to as collectors items.
Interesting, exactly what I thought. what does it mean?
It means that you only pay VAT on the difference between the amount that you paid and the amount you sold it for later.
I seem to have mislaid my calculator. How much profit would I have made if I used the VAT margin scheme?
Well you only pay it on the difference. So you would only pay VAT on the £500 difference between the price you bought it at and the price you sold at.
But that’s only a VAT of £83!
And a missed profit £417.
Think of the music memorabilia I could buy. I could start helping to save the world and make a tidy sum. Why doesn’t everyone do it?
Well, there are some conditions - including record keeping - that put people off. You cannot use a margin scheme for any item you bought for which you were charged VAT, precious metals, investment gold, precious stones and...
Hats?
There are special rules around selling secondhand cars, horses and ponies, and houseboats and caravans too.
Is there anything without a catch?
Oh yes. Second-hand goods, particularly high value goods like handbags, shoes, watches or wedding dresses. works of art, antiques and collectors’ items like your smelly old hat.
Where do I sign?
Woah Woah Woah, it’s not worth everyone’s while. It's important to understand the full picture because you’ll have to pay VAT on the full selling price of each item if you do not meet all the scheme’s requirements. If you used the margin scheme and then HMRC assesses you, there’ll be a shortfall and you’ll be picking up the bill. Also there is quite a lot of record keeping involved.
I was going to sell records as well as memorabilia.
Not those kinds of records You’ll have to keep the regular VAT records, and a stockbook that tracks each item sold under the margin scheme individually with copies of purchase and sales invoices for all items. You must keep VAT records for 6 years. You must keep records until you sell the item for any stock you bought more than 6 years ago that you plan to sell under the margin scheme.
You must have invoices for each item that meet the VAT margin scheme requirements.
*Yawn* can’t you just set it up for me, I make all the money and you do the VAT?
Rude, but yes of course we can see if your items are eligible and whether there’s a commercial value in getting it all set up. If you’ve got friends that are involved in the secondhand market as part of the circular economy, then we can see what can be done.
I’m going to call the business “Clark’s Originals”
Let’s get you an IP lawyer too shall we?
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We are but two fictitious characters throwing out ideas and comment to stimulate debate and collect information. As professional service firms, we are open minded people and think independent thought and debate is essential to help understand, as well as navigate, complex problems. By joves – doing business across Europe (and the world) is set to become a whole lot more complex in light of recent seismic political events. As businesses - we provide information and hopefully some wisdom - and we see this blog and its caricatures merely as a much more fun, perhaps slightly controversial way, of stimulating debate and collecting ideas. We’re searching for some true pearls of wisdom, and as we find them, we’ll share them with you.
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Morning Clark, you look in a bit of a spin.