The supply of horses to the British market is being threatened by the Government’s unannounced withdrawal of the VAT second-hand margin scheme for certain transactions.
From 1 April 1995, the VAT second-hand margin scheme has been available across the European Union (EU) and in the UK for virtually all second-hand goods, including all horses.
The purpose of the scheme is to provide VAT relief to businesses that buy second-hand goods, such as horses from non-registered members of the public, where there is no VAT incurred, and so no input tax to recover.
The amount of VAT chargeable to the customer is reduced such that most British dealers have been entitled to charge a buyer VAT on just their profit margin, rather than the full sale value of the animal. This has enabled those businesses to operate viably and competitively against non-VAT registered traders or individuals. Over the last 27 years, this has benefited both dealers and buyers immeasurably.
A condition of using the margin scheme has always been that the goods must have been obtained via a supply in which no VAT was chargeable. Before Brexit, no VAT was charged by the seller on a horse sold from the EU to the UK and the UK dealer paid no VAT at the point the horse entered the UK.
What has changed?
Since Brexit (31 December 2020), all purchases of second-hand goods from the EU have become imports on which VAT is levied on arrival in the UK.
This change means the purchase is no longer a supply in which no VAT is chargeable, and UK dealers of horses sourced from around Europe have, unwittingly, lost their right to charge their buyers the lower sums of VAT. The margin scheme has, therefore, effectively been withdrawn for UK businesses (with the exception of Northern Ireland) buying horses from the EU.
The consequence will be that either prices of imported horses increase significantly, or dealers absorb the extra VAT cost and suffer reduced profits, potentially making their business unviable.
What does this mean?
Since Brexit, the law has not been amended to enable horse dealers to continue to use the VAT margin scheme; therefore, the output VAT payable on the sale of the horse, should be accounted for on the full selling price.
Tim Warren CBE, owner of Warren Eventing near Bath, has been importing horses from Europe for over 30 years and explains: “As an example, if a UK dealer bought a horse in Europe pre-Brexit for £15,000 and then sold it in the UK for £20,000, there would be VAT to account for on the margin equalling £833, leaving the dealer with a profit of £4,167 before other costs.
“Post-Brexit, dealers have to account for VAT on the full sale price of £20,000, increasing the VAT to £3,333.33, Leaving the dealer with a profit of only £1,667 before other costs. After adding transport and insurance costs, along with the import and export agents’ fees, and other necessary expenses, there is little left to make it worthwhile.
“For decades, I have done this work for the satisfaction of selecting young horses which go on to become top competition horses. Facing thousands of pounds in extra VAT, I will have to question whether it is even possible to continue. Government should consider the situation and take action.”
Lucie Hammond, Partner in Hazlewoods Farms and Estates team leading on their equine specialism, says: “We have many clients operating similar businesses, who are now faced with this dilemma. The options are to either put up prices, or to absorb, at least in part, the extra VAT cost. Those who continue as before run the risk of an HMRC investigation, which could result in a VAT bill, interest, and potential penalties.
“We are not aware that any specific announcement was made to publicise these changes, and HMRC’s margin scheme guidance for buying and selling horses is silent on EU imports. Therefore, many international horse dealers in Britain will not be aware of the change in their VAT position and may have miscalculated their VAT liability since 1 January 2021.”
To correct the position, the Government will need to amend legislation to allow horse dealers to continue to use the margin scheme on horses imported from the EU.
If this change effects your business, you should:
- Make sure you are correctly accounting for VAT on the full sales price of horses imported since 1 January 2021.
- Consider making a protective claim to HMRC in respect of the difference between the VAT payable on the full selling price, and the VAT payable under the margin scheme.
This has certainly been an unintended consequence of Brexit and one which appears to have been overlooked by HMRC and HM Government.
Post-Brexit improvements are urgently needed to prevent businesses from suffering; business owners might consider lobbying their MP for a change to the post-Brexit legislation, to allow the continued use of the VAT margin scheme on horses imported into the UK.
If you would like help or advice regarding VAT on importing horses, or assistance with protected claims to HMRC, please contact Lucie Hammond at firstname.lastname@example.org