VAT: Games company wins capital goods point
The props and rooms used by an escape room company were capital goods for the flat rate scheme. Neil Warren considers the important difference between capital goods and capital assets.
The first tier tribunal case of The Great Escape Game Ltd v HMRC (TC07325) concerned the rules around claiming input tax on capital expenditure for flat rate scheme (FRS) users.
Accountants tend to think FRS users can claim input tax on capital expenditure if the cost exceeds £2,000 including VAT. This statement misses the point: input tax can only be claimed on capital goods and not on the cost of services.
Example – salon extension
Hairdresser Jean paid a builder to construct an extension to her salon – the builder’s invoice consists of his labour charges plus the cost of glass, bricks, wood and cement. No input tax can be claimed by Jean if she uses the FRS because although the materials are classed as goods, they are used to create a capital asset and are not capital items in their own right.
The Great Escape Game Ltd used the FRS in 2016. It’s operated an unusual business where players were locked in a room with a range of props and special effects. The participants had to answer puzzles and complete tasks in order to escape from the rooms.
The tribunal considered whether input tax could be claimed on the invoices relevant to the props and the fitting-out of the rooms because those costs related to capital expenditure goods costing more than £2,000 including VAT.
This is the only time that FRS users can claim input tax, apart from pre-registration input tax in some cases.
HMRC’s main argument was that the supplier of the room fittings and props was mainly providing a design and consultancy service, with the goods being incidental to this supply. The taxpayer said that the panels, screens, fibreglass parts, doors, gates and other items were capital items and not linked to any specific building for the following reasons:
- The items could be dismantled and used at another site
- They were intended to generate revenue over a number of years so were capital in nature.
The tribunal agreed with the taxpayer on both counts but there was another hurdle to overcome.
The £2,000 threshold
The taxpayer said that the key issue as far as the goods were concerned was “what they were providing as a whole” – so an invoice with four items costing £600 including VAT should be treated as a single purchase costing £2,400.
The tribunal agreed and commented that the rooms and the props were supplied in situ as finished articles. The judge said: “It is artificial to treat the different components of the charges making up the rooms and (where relevant) the props, as individually priced goods.”
This verdict is similar to the example given in VAT Notice 733, para 15.3 about the purchase of separate items of kitchen equipment bought for a restaurant. This illustrates that it is the invoice total that counts as far as the £2,000 threshold is concerned, rather than the cost of individual items such as a dishwasher, fridge and oven.
If your FRS clients buy goods that lead to a “finished article” then make sure the supplier issues one invoice for all the goods. If the total exceeds £2,000, they will be able to claim the input tax.
Another FRS snippet from this case was that the company left the scheme on 21 November 2016. You might think it would have to wait until the end of a month or VAT period to leave the FRS.
This is a useful planning point: a business can withdraw from the FRS at any time it wants and in advance of a compulsory leaving date (VAT Notice 733, para 12.1).
If The Great Escape Ltd had some useful input tax to claim on invoices dated 22 November (or payment date of 22 November with the cash accounting scheme), then it makes perfect sense to leave the FRS the day before and revert to normal VAT accounting. There will be two calculations needed for the return that includes the leaving date. Another puzzle is solved!