Contractors using the flat rate scheme (FRS) for VAT should be aware of the rules about buying and selling capital items. According to James Abbott, owner and head of tax at contractor accountant Abbott Moore LLP, there can be pitfalls for contractors unsure of the details.
“There are special rules for high cost capital items such as computers and vehicles,” he warns. “Despite the overarching advantages of the flat rate scheme for most contractors, there are downsides for those buying and selling high value assets.”
When a contractor is disposing of some assets, it may even be to the their financial advantage to leave the flat rate scheme, then make the sale, and wait the statutory 12 months before joining again.
Special rules governing assets over £2,000: single invoice value
The percentages contractors apply to their turnover to calculate the VAT they can reclaim have been based on HMRC’s extensive records of what a typical business in a particular sector might spend, such as an IT consultancy (14.5% at the time of writing) or a management consultant (14%).
For atypical, and usually large, purchases, HMRC has created special rules. Abbott explains: “Contractors account for any capital purchases over £2,000 including VAT as a separate claim to their flat rate scheme return. So, for example, a laptop for use in the business costing £2,200 including VAT can be accounted for separately and the contractor can reclaim the full VAT amount.
“Equally, two laptops costing £1,200 including VAT each have a combined invoice value in excess of £2,000 including VAT and can therefore be accounted for separately and the full amount of VAT reclaimed.”
Abbott highlights that it is the invoice value that is the key factor. Had the contractor bought the two laptops separately, each transaction and invoice would be less than £2,000 including VAT, so could not be accounted for separately and the full amount of VAT could not be claimed.
Capital goods versus capital services
According to Abbott, another pitfall is confusing capital goods and capital services under the special provisions of the flat rate scheme. One can be accounted for and claimed on the contractor’s VAT Return, the other can’t.
“A computer is a capital good, so if its value including VAT is over £2,000 a contractor can account for it separately and claim the full amount of VAT. But if a contractor hires a builder to do some work on their office, even if the cost is in excess of £2,000 including VAT, the contractor cannot claim the VAT on the VAT return.”
Abbott says that’s because all building and construction costs are considered to be capital services, and not capital goods, and capital services cannot be accounted for and claimed separately from the contractor’s regular flat rate scheme VAT return.
Buying and selling company cars: beware the VAT sting in the tail when selling
Contractors cannot claim VAT back on a car bought by the contractor’s limited company which will also be available for private use. This sort of expenditure is, according to Abbott, ‘blocked’ by HMRC for VAT.
Contractors should ask their accountant to do the calculations first before taking the decision to leave the flat rate scheme
James Abbott, Abbott Moore LLP
“But even when a contractor does the sums and decides that it is still tax efficient to buy a company car, there is a sting in its tail when the contractor comes to sell it. Even though it was not possible to claim back the VAT when it was bought, a contractor must include the sale of the car when applying the flat rate to their sales for the quarter, so an IT consultant would need to declare 14.5% of the car’s sales price and pay that over to HMRC when it is sold.”
Depending on the value of the vehicle and its resale price, Abbott suggests that some contractors may be better off leaving the flat rate scheme altogether, selling the vehicle, and then rejoining after the statutory 12 months waiting period.
“Contractors should ask their accountant to do the calculations first before taking the decision to leave the flat rate scheme,” he adds. ”Alternatively the contractor could lease rather than buy the car in the first place, because they would then simply hand the car back after the lease term rather than sell it.”
Buying and selling pickups and vans
For contractors who choose for their company to buy a vehicle like a van, or a four-wheel drive pickup, which is usually classed as a van, the story is slightly different.
“Assuming the cost of the vehicle is above £2,000 including VAT, a contractor can account for the purchase on their VAT Return and claim back the full amount of VAT when purchasing a van.”
If the VAT was reclaimed when the van was purchased, it must then be charged when selling the van. “That’s why you often see second-hand vans on vehicle dealership forecourts showing prices inclusive of VAT.
“The rules governing the buying and selling of assets under the flat rate scheme are straightforward, as long as contractors are aware that there can be pitfalls,” says Abbott. “And when in doubt, they should ask their accountant to calculate the most tax efficient options.”