Understand how the second-hand margin scheme for horses works, how it can be financially beneficial if you are a VAT registered horse dealer and how to calculate the numbers you need for your VAT return.
Updated 7 July 2021
Table of contents
1. How Does the VAT Margin Scheme for Horses Work
The VAT margin scheme for horses is a VAT scheme that is specifically designed to help VAT registered horse dealers. Normally a VAT registered business will reclaim VAT on everything they purchase and add VAT To everything they sell – this is fine if they buy and sell goods to/from other VAT registered businesses.
- Adding VAT at the standard rate of 20% to the price of each horse sold making them uncompetitive in the marketplace;
- Taking VAT at the standard rate of 20% from the price of each horse sold potentially eroding profit margins.
The VAT margin scheme for horses helps protect horse dealers profits by permitting them to pay VAT at 16.67% (1/6th) of the difference between what they bought and subsequently sold the horse for.
2. An Example of the VAT Margin Scheme for Horses
A horse dealer buys a horse from a non-VAT registered individual for £15,000 and then sells it to another individual for £25,000 who is again not VAT registered with HMRC.
Using the VAT margin scheme, the dealer pays VAT to HMRC at 1/6th of the difference between the price they bought and sold the horse at – £10,000 x 1/6th = £1,666.67.
If the horse dealer was using the standard VAT scheme they would have had to either:
- Increase your selling price to £30,000 to cover VAT of 20% (£25,000 x 20%), making them potentially uncompetitive;
- Take VAT of £4,166.67 out of their selling price (£20,000 x 20/120).
Read this guide to find out how to work out VAT.
As you can see, the VAT margin scheme is very beneficial to second-hand businesses that sell to non-VAT registered individuals because it results in tax savings.
3. How to Join the Second-Hand Margin Scheme
Horse dealers don’t actually need to register to use the second-hand margin scheme, they can just start using it. That being said, it is their responsibility to make sure they are eligible to use the scheme.
You don’t actually need to register to use the Second Hand Margin Scheme, you just start using it.
4. Which Horses Can Be Included in the Scheme
A horse or pony which was owned previously by someone else is classified as second hand for the purposes of the scheme. But horses bread by dealers that they are selling for the first time cannot be included as second-hand. regardless of how much work or expense you have put into preparing it for sale. This topic became the subject of a huge investigation by HMRC, in which the puppies were being classified incorrectly as second-hand resulting in large fines for the puppy seller.
5. Record-Keeping & Invoicing
Second-hand horse dealers must keep certain records to support the use of margin scheme in case HMRC ever investigate their VAT returns. For each sale, the dealer must make sure they include the following information on sales invoices, purchases invoices and their stock book including:
- unique identifying passport number
- type or breed (for example, cob or thoroughbred)
- age (if known)
- stable name (if known), and
- distinctive marking