Margin scheme on goods appropriated to stock

[Incredulum]

For many years, an individual has collected items by way of hobby. Following retirement he decides to start trading them. He appropriates his collection to trading stock, whilst buying further. For income tax purposes this appropriation is at market value, there being a notional capital disposal.

What happens on the margin scheme? What is the acquisition cost for these purposes?

By way of example, an items was acquired for £100 in 1970. Now it is worth £5,000.

[Incredulum]

Supplementary question.

The situation is the same as above, however sales are slow to begin with, and he is well below the VAT threshold. However, he then incorporates, and the company pays him £5,000 for the item.

Anticipating sales to increase, the company then registers for VAT, again under the margin scheme.

[Generix]

For many years, an individual has collected items by way of hobby. Following retirement he decides to start trading them. He appropriates his collection to trading stock, whilst buying further. For income tax purposes this appropriation is at market value, there being a notional capital disposal.

What happens on the margin scheme? What is the acquisition cost for these purposes?

By way of example, an items was acquired for £100 in 1970. Now it is worth £5,000.

To my mind, due to the strict record keeping rules, unless the guy has a stockbook showing purchase invoice etc then the item can't be used in the margin scheme - as they weren't anticipating this as a business venture a the time I guess they won't have the records.

In any case the current value would not be the purchase price, it would be the purchase price paid including insurance, transport etc, and I believe restoration costs etc (if they apply).

Anyway it's likely these can't be used in the margin scheme, so either claim its not a business venture earnestly pursued and therefore sales not subject to VAT anyway, or as you mention keep sales below threshold annually (where possible).

[Generix]

Supplementary question.

The situation is the same as above, however sales are slow to begin with, and he is well below the VAT threshold. However, he then incorporates, and the company pays him £5,000 for the item.

Anticipating sales to increase, the company then registers for VAT, again under the margin scheme.

in scenario 2 the purchase price is the £5,000 and just make sure you follow all the rules on record keeping.

HMRC might challenge on valuation between related parties if its being done to sway the margin etc. I'm no margin scheme expert but there may even be anti-avoidance to snag such arrangements (i.e. related party transactions not eligible for scheme? although Ihaven't heard of this before).

Hope I have been semi-useful

[RAL]

Vat Notice 718, Para 13.4 states

The private sale of goods which are not assets of your business is usually outside the scope of VAT and no VAT is due.

However, if:

you are a sole proprietor, and
you sell an eligible item (see paragraph 2.7) which you transfer to your business from your private holdings
you can use a margin scheme for the sale of that item.

You must be able to produce evidence of what the purchase price was when you bought it for your private use. If you cannot do this, you must account for VAT on the full sales value.

I would prefer option 2. Incorporate and sell to the company at market value. Depending on personal circumstances and value of the items, it may be favourable to treat as a capital disposal (of course subject to meeting badges of trade)

[Generix]

Am I missing some sort of other tax reason that makes it a good thing to make these sales as a business rather than just a hobby / non-business?

[RAL]

(of course subject to meeting badges of trade)

This should say not meeting the badges of trade.

[RAL]

Am I missing some sort of other tax reason that makes it a good thing to make these sales as a business rather than just a hobby / non-business?

Probably my post is not clear.

I suggest is to sell to the company at MV. so when the company (incorporated) sells the cost is higher so lower margin (compared to if individually appropriates stock to the business, so lower vat on margin.

As individual sell to the company, with subject to the badges of trade, if these disposals can be treated as capital instead of income, then (depending on personal circumstances) the individual have annual allowance of £10,100, some of the low value items will be subject to chattels rules. So IMO, I prefer second option.

[Incredulum]

Generix. Clearly for the assets that were acquired into a private collection, now being sold off, this is sale of private assets. However, the sale of the private collection is being extended into becoming a proper business of buing and selling similar items, which is clearly subject to income tax on profits.

I had thought for the individual to commence trading, and appropriate these items to stock (all falling under the small chattels CGT exemption - any chattel sold for less than £6,000 is CGT free), taking the benefit of offsetting set-up costs against income tax other income. Then to incorporate the business and then register for VAT if necessary. However, it strikes me that as the value of the assets transferred to the company on incorporation exceeds the VAT limit , this might cause VAT problems?

So I sense the best solution will be for the individual to continue to own his own items as capital items. Incorporate a company and it then starts a business. And the incorporated business can then just sell the items on commission, title never passing to the company.

The only downside is the loss of AIA etc. offset against income tax other income.

[Incredulum]

This also avoids the debates around "market value".

An item may be acquired at auction for £10, and then sold to an unsuspecting member of the public for £100. What is the market value for appropriation to stock?