Credit, debts and related services: credit and related services: pawnbroking
A borrower (or ‘pawnor’) approaches a pawnbroker and offers to pledge (or ‘pawn’) an item of personal property as security for a loan. Before accepting the personal property as security a valuation may be arranged, for which a charge is made. If the pawnbroker considers the item to be of sufficient value, he will offer to loan the borrower a fixed sum of money at a fixed rate of interest. If the borrower accepts, a credit agreement will be drawn up (normally, but not necessarily, regulated by the Consumer Credit Act 1974 (‘CCA’)), which will set out the terms and conditions of the loan etc. The borrower, by entering into this agreement, agrees to repay the loan together with the interest thereon by a fixed date (the redemption date).
Under loans regulated by the CCA the redemption date is always a minimum of six months from the date of the credit agreement and within the time agreed the borrower can redeem the property by paying the original amount loaned plus any interest (see further guidance on redeemed pledges in paragraphs below).
If, after the expiry of the redemption date, the borrower has not repaid the loan and the loan was for less than £75 and the credit agreement period is less than six months, the pawnbroker gains title to the goods. In these instances please read the sub-paragraph on this topic further below.
If, after the expiry of the redemption date, the borrower has not repaid the loan and the loan was for over £75 the pawnbroker will issue a notice advising that the pledged item is due to be sold and giving a further statutory period of fourteen days in which to redeem the pledge. (The borrower may have the option to extend or renew the loan period.) Where this occurs please read the sub-paragraph on this topic further below.
For unredeemed pledged items the relevant law is in sections 120 and 121 of the Consumer Credit Act 1974 (as amended).
Pawnbrokers - liability of charges made
A pawnbroker may make a variety of charges under a credit agreement:
- interest - payments received are exempt from VAT under item 2
- valuation - the valuation service also falls to be exempt under item 2, if it forms an integral part of the exempt supply of the granting of credit (see VATSC80000 for further guidance on single composite supplies and multiple supplies)
- cleaning/repair - where a trader makes a charge (provision for which is made in a loan contract) for selling unredeemed pledges, which may include an element for cleaning and repairing the goods before they are put on display, this fee is seen to be a further charge for the granting of credit and is exempt under item 2.
The dominant service is the ‘granting of credit’ by the pawnbroker to the borrower.
Pawnbrokers - redeemed and unredeemed pledges
There is no further supply for VAT purposes if someone redeems a pledge within the agreed redemption period. A pawnbroker trader should not account for VAT on the redemption.
Loans not exceeding £75 with a six month redemption period
If the loan is for £75 or less and the pawnbroker adopts the statutory six-month redemption period, ownership of the pledge passes to the pawnbroker if it is not redeemed within that time. If the pawnbroker disposes of the goods to a third party the pawnbroker is making a taxable supply. The pawnbroker must account for VAT on the full selling price.
Unredeemed goods restored to the pledgor within three months following the end of the redemption period are treated as a redeemed pledge. The pawnbroker need not account for VAT provided he:
- records the redemption in the pawnbroker’s pledge stock records; and
- stamps the ‘Credit Agreement and Pawn Receipt’ with the date of redemption and keep it for inspection by Customs and Excise.
If the pawnbroker and the pledgor have agreed to extend the original agreement by one or more further six month periods, under a modifying agreement or agreements, the three month ‘grace period’ will start when the extension expires.
The restoration of an unredeemed pledge is a taxable supply if it takes place more than three months after the expiry of the credit agreement. The pawnbroker must account for VAT in the normal way.
Loans exceeding £75 with a redemption period other than six months
If the loan is for more than £75, or the redemption period has been agreed for a time other than the statutory six months, ownership of the pledge does not pass to the pawnbroker at the end of the redemption period. The pawnbroker is not making a taxable supply if he then disposes of the goods to a third party.
The pawnbroker should not account for VAT unless the pledgor is a taxable person and the pledge is something the pledgor has acquired in the course of business. In those circumstances the disposal of the goods is a taxable supply by the pledgor, and the pawnbroker must account for VAT in the way described in paragraphs 8.11 and 18.4 of VAT Notice 700 The VAT guide.
If the goods are sold by auction, the auctioneer will account for the tax.