Melanie Lord explains how a recent tribunal decision has VAT implications
for ‘used’ dogs and ‘second-hand’ horses
What’s the difference between dogs and horses? They both have a leg in each corner, are widely owned as pets and working animals and are used extensively for sport. So you might say they are very similar and expect them to receive similar treatment for VAT purposes. However, a recent tax tribunal decision decided against Little Rascals Pets Ltd (TC 05811) moved well away from a treatment that had long been established for horses.
Little Rascals sold puppies and the argument centred on whether some of the puppies could be treated as second-hand goods, in which case the margin scheme could be applied and benefit Little Rascals.
The margin scheme is designed to create an equitable result where goods are actively bought in from members of the public. An example would be where a used car is traded in against the purchase of another car, the dealer can use the margin scheme to limit the amount of VAT it has to pay to HMRC to one-sixth of the profit margin. Clearly this is an advantage over having to treat the whole selling price as VAT inclusive.
Little Rascals wanted to apply the margin scheme to some of its puppy trade and the issue the parties disagreed about was what being a ‘used’ animal actually meant in practice.
The Little Rascals argument centred on whether a puppy bought from a breeder who wasn’t VAT registered could be included in the margin scheme on the basis that the puppy was second-hand. Clearly it had changed hands and, if we were looking at horses and ponies, that seems to be sufficient for the margin scheme to apply. Contrast the tribunal’s view that “second-hand goods are those suitable for further use, and – for there to be further use – there must have been a prior use”. The tribunal did not accept that the dog’s time with the breeder nor its time with Little Rascals was sufficient to constitute “prior use”.
It is interesting that the Little Rascals tribunal decision includes a detailed analysis of a case in the European Court of Justice (ECJ) (Förvaltnings AB Stenholmen v Riksskatteveeret – case C-320/02 2006 BVC 82). This looked at when a horse could be treated as second-hand goods. The tribunal considered itself bound by the ECJ decision and concluded that animals cannot be second-hand goods when they are bought from their breeder. What was disappointing was that no-one drew the tribunal’s attention to the procedure used in the UK for horses and ponies which seem to be at odds with both the ECJ and Little Rascals decisions.
While the Little Rascals case doesn’t create a legal precedent, if the tribunal’s line was adopted by HMRC there could be a widespread impact.
There are other markets where the margin scheme is applied to ‘pre-owned’ goods on the basis that the goods have passed through the hands of a prior owner. For example high end, pre-owned watches are actively traded across the EU, marketed as having the original manufacturer’s packaging intact. These watches will not have been worn by anyone and therefore cannot be said to be ‘used’. However they have had more than one owner and have therefore passed through a second pair of hands and so might be described as second-hand. So is it right for the margin scheme to be restricted to ‘used’ goods?
Perhaps the Little Rascals case will shine a spotlight on the ECJ’s decision and bring the VAT treatment of animals and other second-hand situations into question. It would not be the first time that a case upsets VAT procedures thought to be secure after being used for decades. The absence of prior cases and commentary on what being second-hand actually means suggests that no-one has been looking closely enough at this question to recognise an argument lurking in the shadows.
Certainly the Little Rascals case focuses on a point that hasn’t been tested in the UK courts: What exactly are ‘second-hand’ goods? Are they goods that have had a previous owner and are still fit for use? Or are they goods that have actually already been used? Or is it enough for them to have pre-owned? I suspect we will be hearing more about the margin scheme.
In the meantime any clients using the margin scheme would be well advised to take a long, hard look at whether their supplies might fail the tribunal’s line of not having already been used.
The way ahead
If you’re going to arrive at the right way to handle VAT you need to objectively analyse what is happening and then equally objectively look at whether a VAT relief can be applied. VAT applies unless there’s a specific relief, effectively operating on a ‘guilty unless proved innocent’ basis. In this and future articles I hope to provide insights that help ICPA members steer their clients away from unnecessary VAT problems.
• Melanie Lord is a Director of AVS VAT
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