Secondhand zero rated goods: HMRC acknowledges Public Notice applied VAT charge incorrectly

An accountancy practice we have acted for has a client in the business of selling secondhand goods, some of which are zero rated, on an undisclosed agency basis.

The client had been accounting for VAT under the margin scheme for secondhand goods and accounting for VAT on the margin for all the goods, including those that were zero rated.

This was in keeping with HMRC notice 718, in spite of the fact that Notice 700 states that an undisclosed agent is treated as being brought into the supply chain – i.e. is treated as buying and selling the goods as principal. Oddly auctioneers were entitled to zero rate their commission if acting on an undisclosed basis.

The practice sought our opinion as to whether this is correct and our advice was that all the consideration was subsumed into the deemed supply as principal, and what was retained was the vendor’s profit. HMRC was not entitled to levy an additional VAT charge on the commission. This amounts to having its cake and eating it.

A partner in the practice wrote to HMRC questioning whether this is correct and highlighting the different treatment for auctioneers. Surely enough, the practice received a reply stating that this was correct because the idea was to charge VAT on the underlying commercial transaction; i.e. the agency service, which attracts the commission. The different treatment for auctioneers was now being looked into.

With HMRC sticking to the guidance offered in its publications it was necessary to flag up the fact that the published guidance was incorrect in law and did not stand up to basic accounting.

The practice wrote again flagging the fact that if the guidance was correct there would be two VAT charges with regard to one supply of goods to one individual. If the goods are standard rated this would mean VAT on more than went in the till.

This second letter set out reasons why the VAT charge on the commission was contrary to Community Law, given that there was no additional consideration for the agency service over and above what was taken from the end customer, on which VAT had been accounted for under the margin scheme.

HMRC wrote back acknowledging that the advice given based on the Public Notice was incorrect, and that it contravened UK Law.

The letter also stated that HMRC Notice 718 was being revised as a direct result of the enquiry from the accountancy practice. That should look good on their notice board.

Meanwhile they have had the pleasure of advising their client that a claim needs to be made for a refund of the tax overpaid in the past as well as the fact the zero rate applies in the future.

I hope that this clarifies the situation concerning the agent's status and the appropriate VAT treatment for the margin/commission. I am pleased to advise that Notice 718, Margin Schemes for Second Hand Goods, is in the process of being revised and as a direct result of your enquiry, it is intended that the information relating to agents will be explained much more clearly in the new version.

Might you have overpaid VAT in the past?