What Taxes Do Watch Dealers Need to Pay?
Try to imagine this: You've just had an incredible quarter. You’ve successfully sold several high-value luxury timepieces, maybe a rare Patek Philippe, a vintage Rolex Daytona, and a few modern Omega Speed masters.
Business is thriving, and you’re feeling on top of the world. The profits are rolling in, customers are happy, and you’re already thinking about reinvesting in your inventory to expand your offerings. Everything seems to be moving in the right direction.
But then, a few months later, you receive an unexpected letter from HMRC—the kind that every business owner dreads. It’s a notice about unpaid VAT and under-reported corporation tax.
Your heart sinks as you realise that, despite your success in sales, there were errors in your VAT returns or maybe you missed some key tax deadlines. The letter explains that not only do you owe the unpaid tax, but there are additional fines and penalties due to the late payment and non-compliance.
Suddenly, the hard-earned profits from those high-value watch sales don’t look so great. Instead of celebrating your success, you’re staring down the barrel of a large tax bill that eats into your margins, threatening to put your business in a difficult financial position. What once felt like a winning streak now feels like a heavy burden of stress, uncertainty, and frustration.
Seems like a terrible nightmare, right?
I know, but the truth is this scenario is avoidable, and it starts with having the right knowledge and the right systems in place.
Knowing your tax obligations—especially when it comes to VAT, corporation tax, and income tax—is critical. And by keeping accurate records, understanding the rules around the VAT Margin Scheme, and filing your taxes on time, you can sidestep these unpleasant surprises from HMRC.
In this blog post, I will be answering some of the most popular tax questions I get from a lot of watch dealers I work with. I’ll try to break down everything you need to know about the tax obligations for watch dealers, so you can avoid costly mistakes and focus on growing your business.
Sounds like something you wanna learn about? Cool. Then let’s get right into it
Table of contents
Do Watch Dealers Need to Pay Corporation Tax?
If your watch dealership is set up as a limited company in the UK, you are required to pay corporation tax on your profits.
Corporation tax is a tax on the profits your business makes. Understanding how corporation tax works and when it applies is crucial for watch dealers who want to ensure they’re meeting their tax obligations and maximising profits.
What Profits Are Subject to Corporation Tax?
Corporation tax applies to all profits generated by your business. This includes:
Profits from trading activities: The income you earn from buying and selling watches.
Profits from investments: Any income your business earns from investments, such as interest or dividends.
Profits from the sale of assets: If you sell a valuable piece of equipment or other business assets, any profit made on that sale may also be subject to corporation tax.
How Do You Calculate and Pay Corporation Tax?
Calculating your corporation tax liability involves reviewing your business’s total profits and applying the corporation tax rate. It’s important to keep detailed financial records throughout the year to make this process as straightforward as possible.
Filing Your Corporation Tax Return: At the end of your financial year, you will need to file a corporation tax return (CT600) with HMRC. This return will detail your business’s profits, allowable expenses, and the amount of corporation tax you owe.
Deadlines: You must file your corporation tax return within 12 months of the end of your accounting period, but any tax owed must be paid within 9 months and 1 day after the end of your accounting period.
What Happens if You Don’t Pay Corporation Tax?
Failing to pay corporation tax or missing deadlines can result in significant penalties from HMRC. These penalties can quickly add up and may include interest on late payments. To avoid this, it’s important to stay organised and ensure that your accounts are in order well before the filing deadline.
How Does VAT Apply to Watch Dealers Selling New and Used Watches?
When it comes to VAT, the treatment differs depending on whether you are selling new or used watches. As a watch dealer, understanding these differences is crucial to ensure you’re complying with HMRC regulations and optimising your VAT payments.
VAT on New Watches
For new watches, the VAT is straightforward. If you are registered for VAT, you are required to charge the standard rate of VAT (currently 20%) on the full sale price of the watch. This means that every new watch you sell will have VAT applied to the total price, which you then pay to HMRC.
Example: If you sell a new luxury watch for £10,000, you must add 20% VAT, making the total price £12,000. The £2,000 VAT portion is paid to HMRC.
VAT on Used Watches
VAT for used watches is a bit more complex, as you may be able to use the VAT Margin Scheme, which is designed for second-hand goods. Under this scheme, you only pay VAT on the profit margin—the difference between what you paid for the watch and what you sold it for.
Example: Let’s say you buy a second-hand Rolex for £5,000 and later sell it for £7,000. Under the VAT Margin Scheme, VAT is only payable on the £2,000 profit, rather than the full £7,000 sale price.
However, there are specific record-keeping requirements for using the VAT Margin Scheme. You must keep detailed records of every transaction, including the purchase price, sale price, and profit margin. Failing to do so can result in penalties or loss of the scheme’s benefits.
Choosing the Right VAT Scheme
The VAT Margin Scheme is ideal for watch dealers who deal primarily in second-hand luxury watches, as it allows you to reduce the amount of VAT you pay and potentially offer more competitive prices. On the other hand, if your business deals in both new and used watches, you may need to charge standard VAT on new watches while using the VAT Margin Scheme for used ones.
What Other Taxes Apply to Watch Dealers in the UK?
Beyond Corporation tax and VAT, watch dealers in the UK must also be aware of several other taxes that can impact their business. Understanding these taxes will help you stay compliant, plan financially, and avoid unexpected bills.
Let’s have a look at some of them.
National Insurance Contributions (NICs)
If you employ staff in your watch dealership, you’ll need to pay National Insurance Contributions (NICs). NICs are a type of tax that helps fund public services like healthcare and pensions. Both employers and employees must pay NICs, and the rates vary depending on the level of earnings.
Example: If you have an employee earning £30,000 a year, you’ll need to calculate and contribute employer NICs on their salary.
Business Rates
If you operate your watch dealership from a physical retail location, you may also need to pay business rates. Business rates are similar to council tax, but they are applied to commercial properties. The amount you pay depends on the rateable value of your property, which is assessed by your local council.
Example: If your shop’s rateable value is £20,000, your annual business rates bill could be around £9,800, depending on your location and any reliefs you may be eligible for.
Income Tax for Sole Traders
If your watch dealership is set up as a sole trader business rather than a limited company, you’ll need to pay income tax on your business profits instead of corporation tax. The amount of income tax you pay will depend on your total income and which tax bracket you fall into.
Example: If your total income from selling watches is £40,000, you’ll need to calculate your income tax based on the current tax brackets (e.g., 20% for basic-rate taxpayers).
Understanding these taxes is vital for keeping your business compliant and managing your finances effectively. Each tax has its own deadlines, calculation methods, and payment procedures, so it’s crucial to stay organised.
What Tax Deductions Are Available for Watch Dealers?
One of the ways to reduce your tax liability as a watch dealer is by taking advantage of tax deductions. These deductions allow you to subtract certain expenses from your taxable income, thereby lowering the amount of tax you owe.
What Expenses Can Watch Dealers Deduct?
As a watch dealer, several allowable expenses can be deducted from your taxable income. These include:
Cost of Goods Sold (COGS): The amount you paid for watches that you resell can be deducted as part of your cost of goods sold. This is often the largest deduction for watch dealers.
Advertising and Marketing Costs: Any money you spend on promoting your business, including online advertising, print ads, and social media marketing, can be deducted.
Office Supplies and Rent: If you operate from a physical location, you can deduct costs related to your office space, including rent, utilities, and even repairs.
Employee Wages: If you employ staff in your watch dealership, their wages, along with National Insurance contributions, are deductible.
Insurance Premiums: Business insurance policies, such as inventory or property insurance, are also allowable expenses.
Professional Services: If you hire professionals such as accountants or legal advisors to help manage your business, the fees you pay them are tax-deductible.
By keeping detailed records of all your business-related expenses, you can ensure that you claim all the tax deductions available to you, helping to reduce your overall tax liability.
It’s worth noting that you can only claim expenses that are “wholly and exclusively” for business purposes. Personal or mixed-use expenses are generally not deductible.
What Are the Common Tax Filing Deadlines for Watch Dealers?
Understanding the key tax filing deadlines is essential for staying compliant and avoiding late fees or penalties. In the UK, watch dealers must adhere to several important tax deadlines, depending on their business structure and tax obligations.
VAT Filing Deadlines
If you are registered for VAT, you will typically need to file a VAT return every quarter. Your VAT return will detail how much VAT you've charged customers and how much VAT you can reclaim on business purchases.
Example: If your VAT quarter ends on 31st March, your VAT return must be filed, and any VAT owed must be paid to HMRC by 7th May.
Each business’s VAT periods may vary, but the most common schedule involves quarterly filings. Missing VAT deadlines can result in penalties, so it’s important to keep track of when your returns are due.
Corporation Tax Deadlines
For watch dealers operating as limited companies, corporation tax must be calculated and paid annually. The deadline to file your Corporation Tax Return (CT600) is 12 months after the end of your accounting period, but the tax owed must be paid within 9 months and 1 day after your accounting period ends.
Example: If your business's financial year ends on 31st December, you must pay any corporation tax owed by 1st October of the following year and file the return by 31st December.
Income Tax Deadlines (For Sole Traders)
If you are a sole trader, you’ll need to file a self-assessment tax return each year. The key deadline for submitting your online tax return and paying any income tax owed is 31st January. For paper returns, the deadline is earlier, on 31st October.
Example: For the tax year 2023/24, which ends on 5th April 2024, your online self-assessment return must be filed, and any tax due must be paid by 31st January 2025.
PAYE and NIC Deadlines
If you employ staff, you are also responsible for managing Pay As You Earn (PAYE) and National Insurance Contributions (NICs). These payments are usually due every month on the 22nd (if paying electronically) or the 19th (if paying by post).
By keeping track of these key deadlines, you can ensure that your tax returns are submitted on time, helping you avoid late penalties and interest charges.
A professional accountant can help you manage these deadlines and keep your business compliant, giving you more time to focus on running your watch dealership. If you’re looking for a professional accountant that specializes with working with watch dealers in the uk, you can easily reach out to one at Rhombus Accounting.
How Can Watch Dealers Minimise Their Tax Liabilities?
As a watch dealer, maximising your profits while minimising your tax liabilities is crucial for long-term business success.
Fortunately, there are several strategies you can implement to reduce the amount of tax you owe each year. These approaches not only help you comply with tax laws but also allow you to keep more of your hard-earned money in your business.
Here are a few of them…
1. Take Full Advantage of Tax Deductions
One of the most straightforward ways to reduce your tax liability is by claiming all allowable business expenses. As discussed earlier, you can deduct costs related to running your watch dealership, such as rent, advertising, employee wages, and the cost of goods sold. However, it’s essential to maintain accurate records to ensure you can substantiate these deductions if HMRC ever questions them.
Example: If you spend £5,000 on advertising and £15,000 on inventory purchases for resale, these amounts can be deducted from your taxable income, reducing your overall tax bill.
2. Use the VAT Margin Scheme for Second-Hand Watches
If your dealership specialises in selling second-hand watches, the VAT Margin Scheme is an excellent way to lower your VAT liability. By only paying VAT on the profit margin, rather than the full sale price, you reduce the amount of VAT due to HMRC. To make the most of this scheme, ensure that your records of purchase prices and sale prices are accurate and complete.
3. Plan for Capital Allowances
Capital allowances allow you to claim tax relief on certain business assets, such as office equipment, vehicles, or machinery. If your watch dealership has purchased any large equipment or made significant investments, you may be eligible to claim capital allowances, which reduce your taxable profits.
Example: If you invest in a new point-of-sale system or storage solutions for your inventory, you may be able to claim a portion of the cost as a capital allowance, lowering your taxable income.
4. Consider Incorporating Your Business
If you’re currently operating as a sole trader, incorporating your business as a limited company can sometimes offer tax advantages. For example, limited companies pay corporation tax on profits at a flat rate, which may be lower than the income tax rates that sole traders face. Additionally, limited company owners can pay themselves a combination of salary and dividends, which may reduce overall tax liability.
5. Tax Planning Throughout the Year
Tax planning isn’t something that should be left until the end of the financial year. By reviewing your financials regularly and making adjustments throughout the year, you can minimize tax liabilities more effectively. This might include strategic timing of expenses, reviewing capital gains, or adjusting how you take income from your business.
Conclusion
From managing corporation tax and VAT to taking advantage of allowable deductions there are many aspects to consider when optimising your tax strategy.
But I believe by staying informed about the various taxes that apply to your business, maintaining accurate records, and seeking professional guidance when necessary, you can minimise your tax liabilities and keep your business financially healthy.
Key Takeaways:
VAT Margin Scheme: If you sell second-hand luxury watches, the VAT Margin Scheme can help you reduce your VAT liability by paying tax only on your profit margin. Just ensure you keep accurate records of all transactions to remain compliant.
Corporation Tax: Watch dealers operating as limited companies must pay corporation tax on their profits. Ensure you file your corporation tax return on time to avoid penalties.
Tax Deductions: Make the most of allowable deductions, such as advertising costs, rent, and employee wages, to reduce your taxable income.
Filing Deadlines: Keep track of important deadlines for VAT, corporation tax, and income tax to avoid late fees and fines from HMRC.
I wish you well in your journey going forward.
Thanks for reading!
Meet Lewis
Lewis is a professional accountant and founder of Rhombus Accounting. He regularly shares his knowledge and best advice here on his blog and on other channels such as LinkedIn.
Book a call today to learn more about what Lewis and Rhombus Accounting can do for you.
