A few anomalies and tips on the interaction of the VAT flat rate scheme and purchase of fixed assets:
~ if you buy a capital item with a vat inclusive value of less than £2,000 then there is no additional relief. Your relief come through the normal application of the FRS scheme.
~ if you buy a capital item with a vat inclusive value of more than £2,000 then in a departure from normal FRS rules. VAT input tax can be claimed, but note:
– this applies to goods, not services. So building works carried out the the value of £3,000, materials and labour, by a builder would not count as these are services. £3,000 of building materials for a capital project supplied direct to you would count.
– the claim generally applies on a invoice basis, so two items of, say, £1,200 each would qualify if on the same invoice. If the transaction is made at the same time, but the supplier always issues separate invoices for each item, then HMRC will be pragmatic.
– such claims don’t apply to assets for leasing, hire or letting – so yu couldn’t claim VAT back on a van to be hired out.
– normal rules apply re blocked input tax, eg cars for private use – vat cannot be claimed.
~ as the VAT flat rate scheme applies to all income, exempt and non exempt, other than income outside the scope of VAT, a sale of a fixed asset needs to go into income for flat rate purposes, even if you are selling an asset, eg a car or a property, where vat wasn’t claimed. This is a particular problem for a sole trader using FRS, selling a “private” car or a buy to let property. Of course, as these sales are exempt you don’t charge VAT to the buyer, but they are charged to vat at your flat rate percentage.
~ if you sell a capital asset where input tax has been claimed (contrast the previous paragraph, where vat would not have been claimed), and hence you charge vat to the buyer, then the transaction is outside the flat rate scheme, and you have to pay normal output tax not flat rate vat. EG if you sold a van which you previously claimed VAT on, then on sale you charge full VAT to the buyer and include that in your VAT return.
~ if you buy assets from abroad, then you need to pay box two acquisition tax, and input tax can only be claimed under the £2,000 rule above – so if you are buying a £1,000 asset then buying in the UK is more cost effective all other things being equal, as it is a vat nothing rather than including acquisition tax.