You sold a machine which you had used in your business before you were VAT registered. Your accountant has told you that you should have charged VAT on the sale and that you must now account for it out of the proceeds. Is this correct?
VATable supplies
When a VAT-registered business sells an asset, the VAT treatment depends on several factors, including what type of asset is sold. In this article we’re only looking at the sale of equipment, e.g. an item of machinery.
Output tax
Generally, where you’ve used an item of machinery for your business you must charge VAT (output tax) if you sell it, whether or not you reclaimed VAT when you bought it. It’s a common misconception that you don’t need to charge VAT on the sale if you didn’t reclaim it on the purchase.
Tip. However, there is a limited exemption which applies where the input tax is specifically blocked by the rules.
Blocked VAT
Input tax paid on the types of goods or services listed below is not reclaimable (blocked). For some other types of purchase input tax is not fully blocked, instead the VAT recoverable is limited to the difference between purchase and sale cost, i.e. the margin or profit. If you sell an item on which the VAT was blocked the sale is VAT exempt. The list below shows items where input tax is blocked:
- cars – purchased or leased
- goods installed in dwellings in the course of construction
- private imports
- services and goods acquired by tour operators
- goods related to the supply of accommodation to a company director
- goods and services acquired under a margin scheme, such as the second hand goods scheme
- business entertainment.
Example – pre-registration asset. Acom Ltd purchased a brand new van several years before it registered for VAT. The input tax could not be reclaimed at the time of purchase nor when Acom registered for VAT (because such a claim is time limited to four years). The input tax was not blocked, it’s simply that Acom was not entitled to reclaim it, therefore the exemption doesn’t apply and so when Acom sells the van it must charge VAT.
Example – used for exempt supplies. Bcom Ltd bought a yacht solely to provide business entertainment and so the VAT input tax is not deductible (it’s blocked). Note, it does not hire out the yacht for customers to use for entertainment purposes. That would be a VATable supply and would mean Bcom could reclaim the input tax. The sale of the yacht by Bcom is exempt.
Example – used for mixed supplies. Ccom Ltd purchased a piece of machinery and has not reclaimed the input tax it paid as it expects it to be used for exempt supplies. In practice the machine is used for both exempt and VATable supplies. Ccom now intends to sell the machinery. Because the machinery was used for both taxable and exempt supplies the input VAT was not entirely blocked. Therefore, Ccom must charge VAT on the full sale price.
The accountant is correct. VAT must usually be charged on assets sold after registration even if they were bought previously. There are exceptions to this rule. Where the VAT was not deductible, e.g. for a car available for private use so that VAT recovery is blocked, the subsequent sale of the asset is VAT exempt.
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.