Flat Rate VAT on Capital disposals

Flat Rate VAT on Capital disposals

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Flat Rate VAT is a bonus for most of our clients. They profit from their expenses not being as high as the industry percentages dictate. There is always a bit of miffedness when they discover that the 'extra money' they make ends up being taxable. The means of declaring this income has been a puzzle to them (and us) sometimes.

With (say) an income of £40K + £7K VAT, our boy hands over £4,700 and his 'profit' of £2,300 compensates for him having to pay his expenses without any right to reclaim the VAT. In income tax terms, we include his gross expenses as his expenses and declare his income as £42,300.

But what happens on a disposal of capital items at a profit? A franchise bought by the business at £5K is now sold for £20K + VAT. Instinct says the Capital Gain is still £15K, but what's the fate of the extra money £1,150 made as a result of the FRV scheme? Additional disposal proceeds and therefore CGTable? Additional income and therefore ITable? or is it just a tax-free bonus of the system?

Customs don't understand the system and the Revenue don't understand the FRV scheme. Much head-scratching.....
Geoff Challinger

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By User deleted
10th Jul 2006 15:10

It depends
The treatment you adopt on the sale will depend upon how vat was dealt with on the purchase.

1. If the asset was bought whilst under the flat rate scheme (and therefore no input tax was reclaimed), there are no special rules. The proceeds are simply added to turnover for the purposes of applying the flat rate percentage;

2. If the asset was acquired prior to joining the scheme (or if the purchaser chose to claim input tax separately whilst in the scheme), vat must be accounted for separately on the sale using the normal rules - ie the flat rate percentage will not apply.

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By AnonymousUser
07th Jul 2006 18:10

Not tax-free!
BIM 31585 may help a little - see http://www.hmrc.gov.uk/manuals/bimmanual/BIM31585.htm
There is a paragraph on the computation of trading profits but the treatment of capital in the circumstances you describe is not covered. I would have treated the gain as £15K (like you say, being proceeds less cost, both net of VAT - unless no VAT was recovered on the original cost) and any "gain" as a result of the fixed rate scheme would already be part of the trading profits (either because you reduced turnover by the flat rate VAT paid or because it is a separate cost in the P&L).

You may like to check that the VAT on the sale of the franchise has been d/w correctly. This depends on whether the flat rate scheme applied at time of purchase or your client chose to reclaim the VAT as a separate item. See para 12.14 of Notice 733.

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