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 allow recovery in respect of a 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 stock in trade of a motor manufacturer or dealer;
- intended to be used primarily as a taxi, driving instruction car, or self-drive hire, or
- to be used exclusively for the purposes of the business and not to be made available for the private use of anyone.
A client who bought a car for both business and private use, therefore has the input tax blocked. Where a car, on which input tax was not recoverable, is sold, the sale is then exempt.
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.