Can your CAs claim include VAT paid?
Capital allowances and VAT
As you’re probably aware, businesses can claim a tax deduction for the purchase of equipment (plant and machinery (P&M)) through the capital allowances (CAs) regime rather than through the simple rules for day-to-day expenses. CAs are allowed for the cost of equipment. If a business is registered for VAT a CAs claim should not include the VAT element of a purchase unless VAT can’t be reclaimed, e.g. on the purchase of cars. Trap. Where there’s an entitlement to reclaim VAT on a purchase but by mistake or other reason you do not do so, the VAT cost doesn’t qualify for CAs.
Does the flat rate scheme affect CAs?
Our subscriber’s business uses the VAT flat rate scheme (FRS). Under the FRS there’s no entitlement to recover VAT on purchases, although there are exceptions to the rule. Reasonably, our subscriber has therefore claimed CAs for the VAT he paid on purchases of equipment for which he can’t reclaim the VAT. A tax inspector is disputing this and threatening penalties and interest for tax due on overclaimed CAs.
For detailed commentary on exceptions where VAT can be reclaimed, visit https://www.tips-and-advice.co.uk , Download Zone, year 24 issue 10.
No penalty
Before getting into the main question of whether the inspector is right that CAs can be claimed on the full VAT-inclusive cost of equipment by a business that uses the FRS, there’s an important point our subscriber needs to remind HMRC about.
Tip. HMRC isn’t entitled to charge penalties for underpaid tax where the taxpayer (an individual, partnership or a company) has taken reasonable care when completing their tax return but ends up with the wrong result ( yr.21, iss.4, pg.2 , see The next step ). HMRC needs clear evidence that reasonable care wasn’t taken before it can charge a penalty.
CAs including or excluding
The basis of HMRC’s argument seems to be that because the FRS is optional, and our subscriber has chosen to use it, the exclusion for CAs mentioned in the trap above applies. In our view there’s a clear difference between not reclaiming VAT you were entitled to and not reclaiming it because you signed up to a statutory scheme (the FRS), the rules of which don’t allow you to reclaim VAT. What’s more, the inspector’s view doesn’t sit well with HMRC’s own internal instructions which say where recovery of VAT is not allowed “...the VAT paid should be included in the capital expenditure” that qualifies for CAs (see The next step ).
Responding to HMRC
In our view the tax inspector is either ignorant of the CAs rules or is trying it on. Our subscriber’s response should be to direct them to HMRC’s own guidance and ask for details of the legislation that supports their argument, which of course they won’t be able to supply. If that doesn’t deter the inspector, our subscriber should ask that the matter be referred to a more senior inspector for review.
For a previous article on penalties and more information on CAs including a link to HMRC’s guidance, visit https://www.tips-and-advice.co.uk , Download Zone, year 24 issue 10.
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