One of our clients bought a car three years ago and was not able to recover the input tax because there would be some private use. He is now selling the car on; does he need to charge VAT on the sale of it?
The answer is no! Schedule 9, Group 14 of the VAT Act 1994 provides an exemption for supplies of goods where input tax cannot be recovered which applies in the case of the sale of an input tax blocked car.
The conditions for the exemption are that:
Input tax has been incurred by the person making the supply. Input tax includes VAT incurred when the person was not a taxable person such as prior to VAT registration.
• The only input tax is ‘non-deductible’ input tax. Non-deductible means:
• Exempt input tax, i.e. input tax not attributable to taxable supplies or specified supplies, and includes exempt input tax that is actually claimable under the de minimis rule (note 4)
• Input tax that is blocked under the restrictions for business entertainment, building materials, and cars (note 5)
• Where the VAT was incurred prior to registration, it is ‘non-deductible’ if it falls into the meanings above. Pre-registration input tax not falling into those definitions is not within the scope of Group 14.
• The supply is not of land or property to which an option to tax applies.
Examples
A company bought a boat to moor on the Thames for providing champagne receptions to valued customers. As the input tax was irrecoverable on the basis that the use was wholly business entertainment, Group 14 applies, and the sale of the boat will be exempt.
A van was bought five years prior to registration – VAT was incurred but out of time to recover. As the VAT is not within the ‘non-deductible’ definitions above, the exemption does not apply, and the sale will be subject to VAT.
A golf club buys a mower to use in maintaining both its course and its gardens where it holds events such as weddings. The input tax is residual being used both in relation to taxable and exempt supplies. Because part of the input tax was recoverable as attributable to the taxable use, the VAT did not comprise only non-deductible input tax and therefore Group 14 doesn’t apply, and the sale will be subject to VAT. [1]
[1] Reproduced from Croner Taxwise