R&D How to claim VAT that you pay on capital expenditure

The VAT legislation allows flat rate scheme users to claim input tax on capital expenditure in some cases – but which? A number of our clients have asked about which circumstances a claim is permitted, and how you go about making it?

How the scheme works

A bit of background information to begin with, 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. a publican applies a rate of 6.5%. You cannot claim input tax with the scheme, unless it relates to capital expenditure in some cases.

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.

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. That is to say you can claim on goods purchased within the last four years and used in your business during that time if 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 and their cost is more than £2,000 including VAT, then you can claim input tax on your relevant VAT return. This opportunity will include potential spending on vans, fixtures and fittings, computers, plant and equipment, machinery, and other similar assets.

Tip 1. The claim is made in Box 4 of your return in the same way as a non-scheme user.

 

Tip 2. 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 bought 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.

 

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

You cannot claim VAT on capital expenditure that relates to services, but you can claim on capital goods costing more than £2,000 including VAT, even when there is some private use of the asset. Remember to aggregate capital purchases made from the same supplier at the same time for this purpose.

If you are processing your VAT return yourself, you will need to make the claim in Box 4 of your return or else speak to the team at Adderley Hill and we can take you through the steps you need to take or process your VAT return for you.