VQOTW: VAT on the Sale of Assets

My client trades as a limited company and operates using the Flat Rate Scheme for small businesses (FRS). The company purchased a car in 2015 which was used for business and private purposes. He also bought a van for £18,000 + VAT, which had minimal private use. No VAT was recovered on the purchase of the car but he did claim it on the van. My client is now selling both of the vehicles; do we need to account for the VAT on the sales?

Businesses using the Flat Rate scheme cannot generally recover input tax; this is because the flat rates have been calculated to incorporate an allowance for input tax. However, VAT can be recovered on some goods of a capital nature purchased by the business where there is a single purchase, and the amount of the purchase is £2,000 or more including VAT. This provision to allow recovery of input tax on capital expenditure goods would have allowed him recovery in respect of the van.

Whether a business calculates its VAT using the FRS or normal accounting, as a general rule it cannot recover VAT on the purchase of a car. The exception to this rule is when the car is bought, imported or acquired in one of the following circumstances:

As your client bought the car for both business and private use, the input tax is blocked.  Where a car, on which input tax was not recoverable, is sold, the sale is exempt (VATA1994, Schedule9, Group 14).

For a business accounting for VAT under the normal rules, this would mean that output tax would be accounted for on the sale of the van, but not on the car.  However, because the FRS captures exempt sales, a Flat Rate business must account for output tax on the car sale by including it as Flat Rate turnover .

The sale by a Flat Rate business of an asset on which input tax has been recovered is dealt with outside the FRS, meaning that VAT on the sale of the van will be accounted for at 20% as charged, not at the Flat Rate percentage.

Further information is available in VAT Notice 733 and VAT Notice 700/64 Motoring Expenses.

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If you have a VAT query why not contact the VAT Advice Line on 0844 892 2470 to discuss the implications. Our team of experts have a wealth of experience and can also provide a written consultancy service at competitive rates.

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VAT Advisor
0844 892 2470

Arti has worked in VAT since 2004 spending 11 years with HMRC. During her time in the department she was a visiting officer, a business records check officer providing educational visits and spent the last three years on the Alcohol Fraud team where she gained a good understanding of civil penalties and appeals. In addition she was an IT specialist providing support to colleagues and an associate trainer delivering VAT and Penalties training.

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