Andrew Needham looks at the VAT advantages of selling second-hand goods as an agent.
In most cases, businesses dealing in second-hand goods buy the goods or take them as trade-ins from private individuals and then sell them on, using the second-hand margin scheme. Only VAT on the profit margin can be accounted for if the second-hand margin scheme is used. If they use global accounting, even greater VAT savings can be achieved.
However, all the second-hand margin schemes require special record-keeping to be maintained in the form of a second-hand stock book to record the purchase and sale price of each item along with the profit achieved, which can be administratively burdensome.
There are other ways of selling second-hand goods that mitigate VAT costs as well as obtaining cost savings and simplifying administration by using a different contractual relationship with the owner of the goods.
Acting as an agent
Acting as an agent in the sale of second-hand goods has become increasingly popular over the past few years, particularly in the sale of second-hand clothing, mainly up-market designer women’s clothing and accessories that have had little use.
The shopkeeper never takes ownership of the goods and so immediately obtains a cashflow saving in not having to purchase the goods in the first place, and possibly having unsold stock that they are unable to get rid of.
Typically, a shop will take these goods in and charge a commission of 25% or so. The goods will be put on sale at an initial sale price, and if they do not sell in a set period of time, the price will be reduced.
Example: Going…going…gone!
- initial sale price £100
- if unsold after two months, the price is reduced to £50
- if unsold in a further two months reduced to £25
- if unsold after six months in the shop, the goods are recycled, given away or returned to the owner
What type of goods?
If the shop was selling clothes for babies and young children, and it used the same arrangement, the commission would be standard-rated. Yet the clothes are zero-rated! The VAT-efficient arrangement this time is for the shop to take the clothes in on terms that, on selling an item, it buys it in for (say) 75% of the sale price so that it achieves a back-to-back purchase and sale.
Another case in which a business might want to sell as an agent would be new goods such as craft items produced by unregistered suppliers. If it handles the goods as an agent, it accounts for VAT only on the commission to the vendor. The sale of the goods themselves is outside the scope of VAT, being made by the owner (who is unregistered). This does not apply to works of art bought from the artist because a gallery is allowed to use the second-hand scheme for them.
Businesses should make sure their terms and conditions make it clear how the sale is structured, what commission is chargeable and what VAT is due; for example, is the commission VAT inclusive or is VAT charged on top?
Businesses should make sure their accounting system separates the money they are collecting on behalf of the actual vendor from their commissions – which is the business’s actual income for VAT purposes. The paperwork provided to the vendor should show the sale price of the goods, the commission and the amount being paid over.
Practical tip
If a business is selling second-hand goods, it can use a second-hand margin scheme or act as an agent in the sale to improve cashflow and simplify administration
