I can see why this is causing a debate, it is counter-intuitive to consider that a partially exempt business can recover VAT in full on the purchase of an asset used by the business as a whole. In this case however, the business is entitled to recover the VAT on the purchase of the asset. The rationale behind this is that the purpose of the Flat Rate Scheme is to simplify record-keeping for the VAT registered business. There is no requirement under the scheme to distinguish between taxable supplies (at standard, reduced or zero rate of VAT) or exempt supplies: the VAT-inclusive value of all taxable and exempt supplies is included within the turnover to which the flat rate percentage is applied. On this basis, it reasonably follows that where input tax is recoverable no apportionment is required to be made.
This aspect is covered in the Flat Rate Scheme VAT Notice 733, in section 15.8 which looks at both exempt and non-business use of capital expenditure goods
15.8 Apportionments for private use
To help simplify the Flat Rate Scheme, where VAT on capital expenditure goods is reclaimable, the intended use of those items is treated as wholly for taxable supplies.
This means that you do not apportion input tax to cover any planned private or exempt use of the goods. This is different to the normal VAT rules.
For example, if employees are allowed free use of the company van at weekends to move goods, or a business video camera is used free by a friend of the proprietor to video a family wedding, then there is no restriction of input tax or payment of output tax under the Flat Rate Scheme.
A further point to note is that where input tax is claimed on capital expenditure goods, if/when they are sold out of the business, output tax must be accounted for at the appropriate VAT rate for the sale (not at the flat rate).
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