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HMRC internal manual

VAT Taxable Person Manual

Particular trades: second-hand goods retailers

Agent or principal?

Most second-hand goods are now covered by special schemes which enable the retailer to declare output tax only on the difference between purchase and sale price (margin scheme). However, where retailers sell goods which are not covered by such schemes - for example coins and certain goods consisting of precious metals, and precious stones - they may attempt to achieve the same result by offering goods for sale as agent of the unregistered vendor. You will need to decide whether the dealer is truly acting as agent for a vendor who retains title to his goods until they are sold; or whether the dealer has actually bought those goods from the vendor and sold them on to the customer in his own right. Even where the dealer is genuinely an agent, if he is acting in his own name in relation to the sale, then the goods fall to be treated as supplied to him and by him under section 47(2A) of the VAT Act 1994 and he is liable to account for tax on the supply in any case.

How to decide

There is a common approach to determine whether agency exists, which is explained in detail at VTAXPER35500, VTAXPER36000 and VTAXPER36500. This involves building up a package of all necessary information - of which the written agreement, where available, is a vital part - and then testing that package against a number of indicating factors. In the field of second-hand goods retailers, we place particular emphasis upon testing two key elements: title and value. We have developed a number of factors which must be adhered to for the dealer to be acting as agent of the vendor, and a number of indicators, which we say are not normally consistent with agency.

The factors which must be adhered to are as follows:

  • the goods must remain the property of the vendor until sold;
  • the dealer must be able to return the goods to the vendor at any time prior to sale;
  • the vendor must be able to find out the full amount received by the dealer for the goods; for example from price labels in the shop (it is not necessary however, for the vendor to be specifically informed of the sale price by the dealer); and
  • the dealer must either charge a set commission, or agree with the vendor that he will retain anything achieved in excess of the amount the vendor has agreed to accept.

If you are satisfied that these factors are adhered to, you must then proceed to consider the indicators which are not normally consistent with agency. These are:

  • the dealer paying the vendor an advance at the time the goods are left for sale;
  • the dealer repairing goods at his own expense in the hope of achieving higher prices;
  • the dealer offering a guarantee to customers in his own name.

By ‘normally’, we mean that agency can only exist where the above three indicators are present if both parties clearly agree to these practices in writing.

This is demonstrated by the High Court decision in Music and Video Exchange Ltd ([1992] STC 220). The judgement in this case acknowledged that there were factors in the agreement between dealer and vendor which were not normally consistent with agency; for example, the dealer undertook repairs at his own expense and gave a guarantee to the purchaser. However, these factors were viewed as being of importance primarily in the absence of written evidence. In this case, both parties had signed a clear written agreement which bore all the hallmarks of agency, and these factors were not ‘wholly inconsistent’ with that agreement.

Accounting consequences

If, having consulted the above guidance you conclude that your second-hand goods retailer has bought and sold the goods as a principal, he has made only one supply. VAT must be accounted for on the full value of that supply, unless the goods are covered by one of the second-hand schemes or are eligible for zero rating.

If, however, you conclude that the retailer is the agent for the vendor and is acting in his own name (see VTAXPER37820), the goods should be treated as supplied to him by the vendor and onwards by him to the purchaser. The retailer must then account for VAT on the full value of the goods as well as on his own supply of services as an agent in accordance with normal VAT rules governing agents, unless he has chosen to use a margin scheme. Further details on the margin schemes can be found in Notice 718: Margin Scheme for second hand goods, works of art, antiques and collector’s items.

If the retailer is an agent but is not acting in his own name, then he need not account for VAT on the the sale of the goods but only on his fee or commission charged to the vendor. However, this will only be the case if he is genuinely standing back from the transaction, and by the very nature of his business, a second-hand dealer is unlikely to be doing so.

A dealer’s supply of his services as an agent is taxable at the standard rate, regardless of the liability of the goods themselves.

Support for this policy comes from R J and J M Farrimond (MAN/92/978). This case concerned a retailer who sold second-hand children’s clothing as agent for the vendor. The tribunal confirmed that tax was due on the commission charged to those vendors, even though the sale of the actual clothing was eligible for zero-rating.