Flat rate scheme and VAT inclusive AIA claim

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Hey everyone,

So I am on the flat rate scheme (9.5% for hiring out sports/recreational goods) and when I did an AIA claim my accountant told me the figure should be VAT inclusive, as I did not reclaim any of the VAT due to being on the flat rate scheme (there are instances where you can, if it is on one invoice in excess of £2,000.00 but not if the goods are to be hired out, which in my case, they were). HMRC are saying the AIA claim should not be VAT inclusive despite not claiming the VAT back on my expenditure, and that the 9.5% rate already accounts for this. 

HMRC have therefore given me their computation and effectively it means an additional £1400 tax bill, before any penalties. Could anyone offer any advise? My accountant is certain we should be claiming the VAT inclusive figures on AIA, if I have not claimed back the VAT on any expenditure, which I haven't.

Any help would be appreciated!

Replies (5)

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By rmillaree
06th Feb 2024 12:42

. HMRC are saying the AIA claim should not be VAT inclusive despite not claiming the VAT back on my expenditure, and that the 9.5% rate already accounts for this.

Have you asked them (hmrc and accountant) to provide evidence that the hmrc assertion is correct - ideally reference to the capital allowance manual AND legislation?

wouldnt trust any hmrc assertions like this without them being able to provide written proof they arent talking out of their posterior.

Note i dont know the answer here so its a great question!

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By taxdigital
06th Feb 2024 13:46

There are two parts to your query:

1. Input VAT claim on purchase of capital expenditure goods worth more than £2,000 (Reg 55E) is restricted by Reg 55A(1)(c) which says:

capital expenditure goods” means any goods of a capital nature but does not include any goods acquired by a flat-rate trader (whether before he is a flat-rate trader or not)—.........(c) to generate income by being leased, let or hired;

So, to that extent your accountant's view appears to be correct.

2. Now in relation to HMRC's view CA11530 says:
The purchase price of an asset sometimes includes VAT. If the VAT is allowable as input tax (see BIM31500 onwards) it should be deducted from the capital expenditure. In all other cases, the VAT paid should be included in the capital expenditure.

Page 11 of their checklist also has the same instructions:
https://assets.publishing.service.gov.uk/media/5da71c93e5274a5caa945a20/....

May be HMRC's view could be that FRS is a choice available to the trader.

As it's about VAT do wait for others too to respond.

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Replying to taxdigital:
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By rmillaree
06th Feb 2024 18:39

perefct link
May be HMRC's view could be that FRS is a choice available to the trader.

i take the viewpoint they are probably talking out their posterier - imho its reasonably clear for client on flat rate its a matter of fact that the vat is not allowable as input vat as the flat rules say its not.

I see the other argument but that seems very weak on any basic level ref principles wording - i would highly suspect hmrc officer knows didly squat about vat rules - i would highly suspectr for whatever reason they are trying it on or just have it plain wrong.

If nothing else your post is great ammunition to say to hmrc well it clearly says you are wrong here is the link and then see what they say.

Op your acountahnt should really be fighting your corner here in the absence of firm evidence hmrc are right

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Replying to rmillaree:
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By taxdigital
06th Feb 2024 20:25

I was trying (don’t feel great chewing VAT legislation!) to find a statutory basis for what HMRC are saying – that VAT paid should be included in capital expenditure.

Looking at CAA 2001, s.4(2)(a) simply says ‘capital expenditure’ doesn’t include ‘any expenditure or sum that may be deducted in calculating the profits or gains of a trade, profession or vocation or property business carried on by the person’. Whilst OP’s case may appear to have passed this test that isn’t enough.

Going down the explanatory notes (not relevant to the OP’s case though) it says:
https://www.legislation.gov.uk/ukpga/2001/2/notes/division/4/1/12/3?view...

1905 - It is a general principle of income tax and corporation tax that any non-recoverable VAT should be relieved as a cost for direct tax purposes.

1903 – Generally, with VAT, the rules for capital expenditure do not differ from the rules for revenue items.

Whilst one could manufacture an argument on those lines, I’m not yet convinced as ‘irrecoverable VAT’ is generally taken to mean ‘irrecoverable’ in the context of ‘exempt supplies’ as otherwise s.26 VATA will be in point.

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By Joshb674
06th Feb 2024 20:41

Just a further update, I have forwarded the inspector some guidance notes to show our method of thinking -

BIM31585 BIM31585 - Value Added Tax: flat rate schemes - HMRC internal manual - GOV.UK (www.gov.uk) it states - Capital assets
If capital assets are purchased with a VAT inclusive value of £2,000 or more, the VAT can be recovered in the normal way. This concession, however, cannot be used where the assets were:
• acquired for resale, or for incorporation in goods to be sold
• acquired to be hired out, leased or let
• for consumption within one year, or
• covered by the capital goods scheme.

As the items were for hiring out, we did not claim back the VAT.
the Capital Allowances manual - CA11530 - General: Definitions: Capital expenditure and capital sums - HMRC internal manual - GOV.UK (www.gov.uk)
It states –
‘The purchase price of an asset sometimes includes VAT. If the VAT is allowable as input tax (see BIM31500 onwards) it should be deducted from the capital expenditure. In all other cases, the VAT paid should be included in the capital expenditure.’

Also on the above guidance note is the following paragraph –

Computation of trading profits

The flat rate scheme removes the necessity to calculate VAT on each individual input and output for the VAT account. Instead only the flat rate VAT will need to be passed to the VAT account. Where the concession for capital assets is adopted, the VAT reclaimed will also pass through the VAT account.
Expenses will probably be shown inclusive of VAT as it is irrecoverable (similar to a business not registered for VAT), and it is likely that turnover will be shown net of the flat rate VAT payment. You may however find that the flat rate VAT payment is shown as a profit and loss expense rather than deducted from total turnover.
‘Where there is irrecoverable VAT on capital items it will form part of the cost of the asset on the balance sheet and of the cost for capital allowances purposes'.

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