VAT Impact of Selling Goods on no-commission basis

[Greengiant]

Hi,

I have a VAT registered business and sold some goods on behalf of my brother for no commission. All the profit from the transaction + cost of goods (paid by him initially) was transferred back to him after the sale. 

FYI I sell the goods through my account on a third party website (like amazon) which he couldn’t register for.

I understand that I charge VAT on the final sale price as the customer isn’t aware that items sold belonged to my brother, so I would be considered an undisclosed agent. 

He/his business is not VAT registered. 

My questions is, do I;

1. reclaim the VAT from the original purchase my brother made? £350?
2. reclaim VAT on the amount I pay to him after making the sale? £600?
3. Not allowed to reclaim anything

Some figures to help;

Sale price – £700
Purchase Price by my brother – £300
Amount paid to my brother – £600. (I deducted £100 for selling fees, postage & VAT I thought was due, using basis 1) 

I’d be grateful if anyone knew the answer as it’s really confusing me at the moment. 

[Trevor S]

If the goods being sold are second hand, the margin scheme in HMRC’s Notice 718 may be useful – see https://www.gov.uk/guidance/the-margin-and-global-accounting-scheme-vat-notice-718.

Otherwise, there is very little scope for VAT recovery. Being an undisclosed agent has made you an extra step in the supply chain. You can’t reclaim VAT on the £350 that your brother has paid his supplier, as that purchase was made by him rather than you. You also can’t reclaim VAT on the £600 that you’ve paid him, because he isn’t registered so hasn’t charged you VAT. All that you can reclaim VAT on is any expenses that you’ve incurred (e.g. any selling fee charged by the website), as these are services which have been supplied to you.

If you’re planning to do this again, it would be better to buy the items direct from your brother’s supplier, as this would allow you to recover the VAT.

[Greengiant]

Thanks for your quick response @Trevor S

So I know you can become VAT registered for a date up to 4 years prior. My understanding is if my brothers business became vat registered he would be able to reclaim the cost of the items. 

Would that mean the £600 I paid to him. Does that then become a VAT supply of his commission that I can reclaim the cost on?

He would then report the commission in his sale turnover?

[Trevor S]

Provided that your brother has never been VAT registered and hasn’t exceeded the registration threshold yet, he could apply for voluntary registration retrospectively. HMRC’s policy on handling such applications is here: https://www.gov.uk/hmrc-internal-manuals/vat-registration-manual/vatreg21300.

The supply chain is unaffected, as you would still be an undisclosed agent. You brother originally bought the goods.  So, subject to time limitations (see: https://www.gov.uk/vat-registration/purchases-made-before-registration) and still holding VAT invoices from his supplier, he would be able to reclaim the VAT on his purchase. The £600 you paid him is for the sale of the goods on to you. Following registration he would have to pay HMRC the £100 VAT content of this, leaving him with £500. He can issue a VAT invoice to you, which allows you to recover that £100 VAT. You will still need to pay HMRC the VAT content of your £700 selling price. The overall benefit is the value of the VAT on your brother’s purchase. Your brother will be worse off from the registration (by £100 less whatever VAT he paid his supplier), while you will be £100 better off.

But, he can’t just register for this transaction, and he can’t do a retrospective voluntary deregistration. He will have to pay HMRC VAT on all of his business’ turnover since whatever date the voluntary registration is backdated to. Whether that’s worth doing is likely to depend upon factors such as how much other business he does, whether his customers are VAT registered, what proportion of his expenditure includes VAT and what his margins are.

[Author]

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