FLAT RATE SCHEME - 27.08.2020

Reclaiming input tax paid on capital expenditure?

The legislation allows flat rate scheme users to claim input tax on capital expenditure in some cases. But how and when do you make a claim and what traps must you look out for?

How the scheme works

If your business uses the flat rate scheme (FRS), it applies a specific percentage to its VAT-inclusive sales of goods and services made in a tax period to work how much VAT is owed. The rate depends on the category of business to which you belong, e.g. the rate for publicans is 6.5%. You cannot claim input tax with the scheme unless it relates to capital expenditure in some cases.

Tip. If you use the FRS for the first return you submit when you register for VAT, you can claim input tax on pre-registration expenses in the same way as a non-scheme user, i.e. you can claim on goods purchased within the last four years and used in your business during that time, as long as you still own them on your first day of registration. The time limit for services is six months before the registration date.

Capital goods or services?

The starting point is that FRS users can claim input tax on some capital goods they purchase but never on capital services. For example, if you arrange for a builder to construct an extension to your trading premises, you will capitalise this expenditure to your balance sheet but it is a capital service and no VAT can be claimed if you use the FRS. Computer software is also classed as a service.

Trap. You might think that the building materials used in a construction project, e.g. bricks, glass and slates, would qualify as “capital goods” but this is not correct. The materials form part of the construction service and are not capital goods so no input tax can be claimed.

£2,000 limit for goods

If you buy capital goods for your business that cost more than £2,000 including VAT, you can claim input tax on your relevant VAT return. This opportunity will include spending on vans, fixtures and fittings, computers, plant and equipment, and machinery. The claim is made in Box 4 of your VAT return in the same way as a non-scheme user.

Tip. If you buy separate assets as a package, you can treat them as a single purchase for the purposes of the £2,000 limit if they are purchased in the same store at the same time, e.g. a restaurant buying an oven, fridge and dishwasher together as a single purchase of kitchen equipment that collectively cost more than £2,000 - even if the individual components cost, for example, only £1,500 each.

Trap 1. The usual input tax block applies if you buy a car that is available for private use.

Trap 2. You cannot claim input tax if you intend to use the goods to generate income, e.g. boats for hire on a boating lake.

For detailed commentary on the FRS and capital assets, visit http://tips-and-advice.co.uk/vat-dz VA 10.10.02).

Private or exempt use

The good news is that if you are eligible to claim input tax on capital goods, you do not need to restrict the amount claimed if the asset is partly used for exempt or private purposes, such as a camera used by a photographer for private use at weekends.

You cannot claim VAT on capital expenditure that relates to services, e.g. an extension to your premises. But you can claim on capital goods costing more than £2,000 including VAT, even when there is some private use of the asset. The claim is made in Box 4 of your return.

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