The VAT flat rate scheme (FRS) rules block you from reclaiming VAT on purchases except for high value capital assets, e.g. a van. But what’s the VAT position if you bought the asset before you started using the FRS?
Buying capital assets
One of the terms of the VAT flat rate scheme (FRS) is that generally you aren’t entitled to reclaim VAT on purchases. The exception to this rule is for capital purchases costing more than £2,000 (including VAT). For example, if you spent £2,050 in one go on stock you won’t be allowed to reclaim the VAT, but if you spent the same amount on equipment you would. If you sell the asset you must include the proceeds in the turnover figure on which you account for VAT at the FRS rate.
Example 1. Acom Ltd uses the FRS. Its FRS VAT rate is 14%. It buys an item of equipment for £3,000 and reclaims the £500 VAT included in the price. Three years later it sells the equipment for £600. It must add this amount to its turnover on which it accounts for VAT at 14%. This means it pays HMRC £84 in VAT.
Tip. A capital asset doesn’t have to be a single item. A group of assets bought together from the same supplier can qualify (see The next step ). If you sell any of the grouped assets on which you’ve reclaimed VAT, you must account for it as shown in the example above.
Selling capital assets – special rule
If you sell a capital asset which you bought before joining the FRS and reclaimed the VAT paid on the purchase, you must account for VAT at the normal rate (not your FRS rate) if you sell it.
Example 2. Jim registered for VAT in 2014. He bought a van in the same year for £15,000, including VAT of £2,500 which he reclaimed. Jim started using the FRS in 2017. In 2019 he sold his van for £4,200 (including VAT of £700). Jim must account to HMRC for the full £700 VAT he charged and exclude the £4,200 from his FRS calculation so that he doesn’t account for VAT twice.
Watch out for exempt sales
The position would be different if Jim from example 2 had bought a car instead of a van and, because he used it for private journeys, didn’t reclaim the VAT. When he sold the car in 2019 it would be exempt from VAT and so he would not have charge the purchaser for it. Plus, he would not need to include the sale proceeds as turnover for FRS purposes.
Tip. The rule is that if you aren’t entitled to reclaim VAT on the purchase of an asset you shouldn’t charge or account for it when you sell it. Instead the sale counts as an exempt supply.
Exception or second-hand vehicles
If you purchased a capital asset, say a second-hand van, costing more than £2,000 and were not charged VAT by the seller, you should not charge VAT if and when you sell it. But you must include the proceeds in your FRS turnover and account for VAT at the appropriate FRS rate. This is because you would have been entitled to reclaim VAT had you paid it on the purchase.
Tip. Therefore when setting the price for an asset you’re selling, bear in mind the exception above as it means you’ll need to account for VAT at the FRS rate out of the proceeds of sale.
If you bought an asset before you started using the FRS and reclaimed the VAT you must charge and account for it at the normal VAT rates (not the FRS rate) when you sell it. If you weren’t entitled to reclaim the VAT paid on the purchase you don’t need to charge it when you sell the asset. Make sure you exclude the sale from your FRS turnover.