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May 19, 2017

Are Puppies 'Second-Hand Goods' for VAT?

The second-hand goods margin scheme is available to VAT registered traders who typically buy goods for sale from members of the public.

The scheme was introduced to account for the fact the goods have already borne VAT when first purchased and operates by charging VAT on the ‘value added’ amount only (i.e. the profit on sale) rather than on the full value of those goods.

In order for a business to elect to use the scheme, the following conditions must be met:

  • The business must not have been charged VAT on the sale of the item;
  • The goods must be ‘eligible’ goods; and
  • The goods must be tangible moveable property suitable for further use.

Little Rascals Pets Ltd v HMRC

In the recent case of Little Rascals Pets Ltd v HMRC, the First-Tier Tribunal considered whether puppies bought by a trader for onward sale were ‘second-hand’ for the purposes of the second-hand goods scheme.


Little Rascals Pets Ltd (LRP) was involved in the trade of selling puppies, primarily to members of the public.

While the majority of the puppies were home-bred, LRP also purchased puppies from non-registered suppliers in Northern Ireland when they were about eight weeks old.

LRP trained and socialised the puppies before they were sold, typically when they were aged between 10 weeks and 5 months old.

The Case

HMRC relied on the opinion of European Court of Justice (ECJ) in the Stenholmen case that animals bought from their breeder cannot be second-hand goods. In any event, for there to be 'further use' there must have been prior use, and HMRC did not believe that the puppies had been 'used' prior to sale by LRP.

LRP argued that there was no attempt by the ECJ to explain why a breeder should be considered to be in a different position from other sellers of animals. The economic rationale for the second-hand goods scheme was to account for input tax that has already been borne by the original seller. The breeder had incurred costs, such as veterinary bills and food, on raising the puppies from birth to eight weeks on which VAT could have been charged. On this basis, breeders should not be excluded from the scheme.

LRP also claimed that the puppies were used as pets by the original breeder, and/or had been used as pets in their period of ownership prior to sale to members of the public.

The Decision

The Tribunal agreed with HMRC on both points, and held that animals bought from breeders cannot qualify for the second-hand goods scheme and that the puppies had not previously been used before sale.

It was held that the system does not cover newborn animals as they were not subject to VAT before their supply to the dealer, in that they were not charged VAT on the birth of the puppy. The costs incurred in increasing the value of an asset, such as veterinary and training bills, should not be treated the same way as VAT incurred on the purchase price.

In reaching the decision that the puppies had not been used by either the breeders of LRP, the fact that the puppies were eight weeks old and just weaned from their mother when they were bought by LRP was taken into consideration.

Furthermore, comments from the director of LRP suggested that both he and the breeders regarded the puppies as stock and they were acquired with the intention of being sold at a profit. LRP kept the puppies in pens on the farm, rather than kept in the homes of LRP’s employees, and were given numbers rather than names. On this basis, the puppies had not been used as pets by the company.

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