Are ‘as new’ goods classed as “second-hand goods” for the Second-Hand Margin Scheme?

VAT Question

My client buys high end, high value footwear, mainly trainers, from private sellers so does not incur VAT when he buys the footwear. However, he will only buy the footwear if they are still boxed and sealed, so unused and so sold to him as if new.

He has been told that when he sells these items himself, he can use the Second-hand Margin Scheme because he didn’t incur VAT on the purchase. Is this correct?

VAT Answer

From a reasonable analysis of HMRC guidance, we would have to advise that the client cannot use the Second-Hand Margin Scheme when selling the goods.

Whilst, on the basis that they were previously owned by someone else prior to your client buying them, it could be argued that these goods are ‘second-hand’. However, Section 20.1 of HMRC’s VAT Notice 718, defines second-hand goods as:

“Tangible moveable property that is suitable for further use as it is or after repair, other than works of art, collectors’ items or antiques and other than precious metals and precious stones.”

Although this VAT Notice was technically withdrawn and replaced on 23 December 2021 by HMRC’s more simplified guidance, this new guidance still regularly refers back to the more detailed guidance. So, whilst withdrawn, it still appears reasonable to rely on this VAT Notice.

What is often important in reading HMRC guidance is the actual words they chose to use and importantly, in their definition of ‘second-hand goods’ they refer to the goods being “suitable for further use” rather than ‘previously owned’ or something similar.

It therefore appears that HMRC’s definition relies on “use” by the previous owner in deciding whether the goods are ‘second-hand goods’ for the purposes of the scheme.

In the client’s case, whilst the goods are ‘previously owned’ they have clearly not been previously ‘used’ and as such cannot be “suitable for further use”.

After all, if in the context of VAT, ‘second hand’ simply meant ‘previously owned’ then retailers who buy stock from wholesalers would be considered to be selling second hand goods, given that the wholesaler ‘owned’ the goods prior to the retailer.

As a result, the previously owned, unused shoes would not be classed as “second hand” for VAT purposes and would be subject to the standard VAT rules.

Nick Lovett , Tax Manager