My client is changing his business policy with respect to vehicles so that in future vehicles will be leased on contract-hire instead of owned by the company. Several employees are interested in buying the old vehicles. Will he need to charge VAT on the sale of those vehicles to the employees?
There are four possible VAT positions on the sale of assets by a VAT registered business:
- If there was a block on recovery of input tax on the purchase of the asset, for example on the purchase of a motor car, then the onward sale will be exempt from VAT. There are unlikely to be any costs related to selling vehicles to employees, but should they be sold in some other way, for example by auction, and there are costs related to the sale, then any input tax on those costs is exempt input tax and not recoverable unless it falls within the de-minimis provisions for partial exemption
- If there was input tax on the purchase of the asset and the business was entitled to recover at least part of that input tax, then it must charge VAT on the full sale price and account for the output tax. This applies even if the business failed to recover the input tax it was entitled to recover.
- If there was no VAT charged when the asset was bought – perhaps from a private individual or business that was not VAT registered, or from a second-hand dealer who declared that their sale was under the margin scheme – then your client can use the VAT margin scheme to sell the vehicle. This means they do not charge VAT on the selling price but account for VAT on the difference between their selling price and the purchase price. If they are selling the asset for less than the price they paid to purchase it, the VAT to account for under the margin scheme will be nil. For more information on calculating the purchase or selling price of vehicles, please see VAT Notice 718/1 section 3.
- In some circumstances, a business will sell an asset that it purchased more than four years prior to VAT registration so that the VAT incurred would have been out of time to be treated as pre-registration input tax. If the VAT would have been recoverable had it been within the time limits, then, despite the business not having been entitled to recover any VAT, if the asset is sold, it will be subject to VAT on the full selling price.
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