You just need to check my instagram to see just how much I love puppies.  So as you can imagine the case of Little Rascal Pets Limited V HMRC caught my eye last year, not just because it involves puppies but also since it involved one of the most complicated and disputed VAT scheme available – the VAT margin scheme.

What Was the Little Rascal Pets Case About?

Little Rascal Pets Limited bred, but also bought some puppies for re-sale, meaning they had anything like 100 puppies on site at one time.  These puppies were reared, socialised, vaccinated and toilet trained before being sold onto loving families. Little Rascal Pets are a registered business, happily adhering to all the rules & regulations they are legally obliged to in regards to their business, including a VAT registration – but this is where the issue began. Little Rascal Pets opted to use the Second Hand Margin scheme when it came to the sale of the puppies it had bought from non VAT registered breeders, a choice which attracted the attention of HMRC.

What is the VAT Second Hand Margin Scheme?

Normally a VAT registered business will reclaim VAT on everything they purchase and add VAT To everything they sell, which is fine if they buy and sell goods to/from other VAT registered businesses.  However if you operate a second hand goods business, you may be buying & selling used goods to & from individuals who are probably not VAT registered.

As a business you are required to register for VAT once your turnover reaches the VAT registration threshold (for 2018/2019 this is £85,000) meaning you’ll face two challenges if you sell to the general public:

  • Adding VAT to your sales price may make you uncompetitive in the marketplace
  • Taking VAT out from your sales price will erode your margins.

The VAT Margin Scheme can really benefit business affected by the above challenges: under the rules of the scheme you pay VAT at 16.67% (or 1/6th) fn the difference between what you bought the item for and what you sold it for (rather than the standard rate of 20% on the sales price).

Here’s an example of the VAT Margin Scheme with some numbers

You run a puppy breeding business and buy a puppy from a non VAT registered breeder for £1,000.  You then sell that puppy for £2,000 to another individual who’s also not VAT registered.  Using the margin scheme, you will pay VAT on the difference between what you bought & sold the puppy at, which is £1,000.  Therefore you’ll pay VAT of £166.67 on the sale of this particular puppy.

If you were using the Standard VAT Scheme you would:

  • Have no input VAT to reclaim as no VAT was charged on the cost of the puppy you bought;
  • Then either increase your selling price to £2,400 to include VAT at the standard rate, taking your price above the market rate and meaning you pay £400 to HMRC as VAT;
  • Or take VAT of £333.33 out of your selling price of £2,000 and pay it over to HMRC as VAT.

As you can see, the VAT margin scheme makes real financial sense to a second hand business.

The Argument Put Forward By Little Rascal Pets

Little Rascal Pets argued that the puppies had been used as pets from the breeders which they bought them from, making them ‘used goods’ thus meeting the criteria of the VAT Second Hand Goods Scheme.

The Counter Argument by HMRC

The HMRC Tribunal considered the argument put forward by Little Rascal Pets but counter argued that the puppies bought from non VAT registered breeders were not ‘used goods’ on the basis that these puppies were never pets of the original breeders.  These puppies were stock for resale meaning that they should not qualify for the Second Hand Margin Scheme because they are not actually second hand!

The Outcome

Little Rascal Pets lost their argument, albeit an understandable one, as HMRC ruled that the puppies’ prior use was not as a pet, so they should be considered ‘stock’ which makes them ineligible for the Second Hand VAT Scheme.

But I do hope that regardless of the legal outcome that the puppies involved all went to loving homes and have happy lives.

If you are planning to use the VAT Second Hand Margin Scheme think really carefully before you get started with it and seek professional advice if you are unsure.  Ultimately it is your own responsibility to check you can use the scheme as there is no formal application process to go through with HMRC to confirm your eligibility and be formally accepted.

Anita is a Chartered Accountant, turned blogger and creator of the ever popular free Go Self Employed Email Mini Course, which has been completed by hundreds of attendees all over the UK. Using her 10 years experience in accounting, tax and operations for Small Businesses, Anita is on a mission to make finance simple for the self employed, so they can stop stressing about tax & finances and focus on building profitable businesses which will give them the lifestyle they dream of.