Normal VAT rules don’t apply to the sale of equipment if you use the VAT flat rate scheme. What do you need to know to ensure you account for the right amount of VAT?
Flat rate scheme purchases
As you’re probably aware, the VAT flat rate scheme (FRS) can be used by businesses until their annual turnover exceeds £230,000. The scheme doesn’t affect whether and how much VAT you charge but allows you to keep some of it (by accounting for a lower percentage) rather than pay it to HMRC with your VAT return. In exchange, you aren’t allowed to reclaim VAT on your purchases, except for VAT paid on capital assets which cost you more than £2,000 (including VAT).
Tip. You can recover VAT for a group of capital assets purchased from the same supplier at the same time if overall they exceed the £2,000 limit. For example, four new desks for your firm’s office costing £520 each.
VAT when you sell capital assets
Usually, a registered business that sells a capital asset must charge the purchaser VAT and account for it to HMRC. There are exceptions, essentially where you weren’t entitled to, and didn’t reclaim, the VAT you paid on the purchase. For example, VAT on the cost of a car used for some private travel. These rules apply to all registered businesses including those which use the FRS.
Accounting for VAT
Where you’re required to charge VAT, you’ll need to account for it on your quarterly return in one of two ways as shown by the following examples.
Example 1. Gary is a builder who uses the FRS. He bought a van for £3,000 plus VAT of £600. He recovered the VAT through his quarterly returns. He sells the van for £1,000 plus VAT of £200. This is a sale outside of the FRS and so he must account for £200 in Box 1 of his next return and include the net sales figure of £1,000 in Box 6. The same rule for working out and reporting the VAT would apply if Gary had bought the van (regardless of the price he paid) before joining the FRS and reclaimed the VAT under the normal rules.
Example 2. While using the FRS Verity bought a packaging machine for her business for £1,500 plus VAT of £300. She was not entitled to reclaim the VAT because the purchase price was less than £2,000. She sells the machine for £500 plus VAT of £100. This counts as part of her normal FRS sales. Assuming her FRS percentage is 12%, Verity must include VAT of £72 ((£500 + £100) x 12%) in Box 1 of her return and include £572 in Box 6.
Trap. The VAT treatment of a car can be problematic if you sell it while you’re using the FRS and have not reclaimed VAT on the purchase, which is rarely allowed. Even though you do not charge the buyer VAT you must account for it at the FRS rate in the same way as in Example 2.
Tip. If the amount you’re asking for the car is a significant proportion of your turnover, you might be better off leaving the FRS to avoid the VAT. You can rejoin it after twelve months.
Tip. To prevent overpaying VAT, make sure your bookkeeper has all the information they need about a capital asset to decide how to report it on your VAT return if you sell it.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.