Tax Talk: There is VAT On The Sale Of Used Goods

In this series of articles, Cameron Kotze the Tax Partner at Ernst and Young discusses some topical tax issues for our readers.

VERY recently I was asked by a successful businessman to confirm that the sale of second hand goods (and by implication a second hand car) is not subject VAT. My answer was received by total disbelief when I informed him that he was wrong.Yes, there is VAT on the sale of used goods but as with everything else in life, there is an exception to the general rule.They say that 90 per cent of the time it is easy to get it right when you have to determine whether you should charge VAT when selling a good or service.The other 10 per cent of the time it is quite difficult to get it right – and you are bound to get it wrong; not because your logic fails you but because there is no logic to get to the right answer.There is a common misunderstanding that the sale of used goods (commonly referred to as second hand goods) is not subject to VAT.This misunderstanding may be as result of the original intention in the draft legislation to exempt the sale of used goods from VAT.The sale of used goods has been subject to VAT from the time when VAT replaced sales tax.There is nothing difficult about this rule but again there is an exception to this rule when a VAT registered person sells a passenger vehicle.This misunderstanding is caused by the specific rule that applies to the sale of passenger vehicles by VAT-registered persons.I will deal with this in a follow up article but need not say more than where a VAT registered person cannot claim input tax when buying a passenger vehicle, no VAT must be charged when that vehicle is sold.The VAT Act defines the term ‘used good’ as anything that is previously owned and excludes living things.Animals can therefore never be used goods for VAT purposes.You should also note that the acquisition of new goods for resale does not make those goods used goods as defined because they were never purchased with the intention to own.It is therefore possible that you can buy new goods without having to pay VAT because the seller is not registered for VAT.If the seller is not VAT registered, no VAT can be charged irrespective of whether the goods sold are new or used.Most of us get to do with this type of transaction when we sell our cars.We are not VAT registered in our private capacity but sell our car to the car dealer who is VAT registered when we trade it in or sell it to any other person.Next time we look at the sale of used cars that is one of the transactions where your logic will get you into trouble.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.My answer was received by total disbelief when I informed him that he was wrong.Yes, there is VAT on the sale of used goods but as with everything else in life, there is an exception to the general rule.They say that 90 per cent of the time it is easy to get it right when you have to determine whether you should charge VAT when selling a good or service.The other 10 per cent of the time it is quite difficult to get it right – and you are bound to get it wrong; not because your logic fails you but because there is no logic to get to the right answer.There is a common misunderstanding that the sale of used goods (commonly referred to as second hand goods) is not subject to VAT.This misunderstanding may be as result of the original intention in the draft legislation to exempt the sale of used goods from VAT.The sale of used goods has been subject to VAT from the time when VAT replaced sales tax.There is nothing difficult about this rule but again there is an exception to this rule when a VAT registered person sells a passenger vehicle.This misunderstanding is caused by the specific rule that applies to the sale of passenger vehicles by VAT-registered persons.I will deal with this in a follow up article but need not say more than where a VAT registered person cannot claim input tax when buying a passenger vehicle, no VAT must be charged when that vehicle is sold.The VAT Act defines the term ‘used good’ as anything that is previously owned and excludes living things.Animals can therefore never be used goods for VAT purposes.You should also note that the acquisition of new goods for resale does not make those goods used goods as defined because they were never purchased with the intention to own.It is therefore possible that you can buy new goods without having to pay VAT because the seller is not registered for VAT.If the seller is not VAT registered, no VAT can be charged irrespective of whether the goods sold are new or used.Most of us get to do with this type of transaction when we sell our cars.We are not VAT registered in our private capacity but sell our car to the car dealer who is VAT registered when we trade it in or sell it to any other person.Next time we look at the sale of used cars that is one of the transactions where your logic will get you into trouble.Should readers have queries, they are invited to send them to cameron.kotze@za.ey.com.