VAT and Asset Sales

Asset Sales and VAT

How many times have you thought about selling a fixed asset but overlooked to consider the VAT implications? What is the VAT position if you sell fixtures, fittings, office furniture or computer hardware? What about selling a car, or business premises? Is the sale always subject to VAT, or only sometimes? Let’s look at the most common assets disposals.

Car Sales

There are two main types of car sales by a business (and we are talking assets here, not the sale of trading stock by a motor dealer): • Selling a car bought as second-hand, will not trigger an output VAT charge unless it is sold at a profit, which is very unlikely! If a profit is made, then output VAT is charged on the sales margin. • Selling a car bought as a new vehicle, is an exempt supply for VAT purposes, meaning that no output VAT should be charged on the sales price. This only applies however, where an input tax block was observed on the purchase of the vehicle because the car was to be made available for private use. There are some very limited circumstances where input VAT can be reclaimed on the purchase of a car, such as by taxi drivers, car hire businesses or driving instructors.

Other Assets

Where your business has bought assets and VAT was charged on the purchase price, you will be required to charge output VAT on the onward sale, as such assets will be standard-rated. Obvious examples are plant and machinery and commercial vehicles. So far, so good. But what if you bought some business assets without a VAT charge – perhaps your business bought some computer equipment from a non-VAT registered trader, or from eBay. Would you still charge output VAT? The answer, as always, depends on certain factors: • If the asset was purchased second-hand, then output tax should be charged on the profit margin made on the onward sale. As with the car example, this is very unlikely, unless you are a good negotiator and have a very good eye for a bargain! • If the asset was bought as brand new, then the margin scheme cannot apply, so you will be required to charge output VAT on the full selling price.

The Flat Rate Scheme and Asset Sales

In order to assist small business with the burden of administration, the Flat Rate Scheme (FRS) was introduced. But what happens if your business uses the FRS and it buys or sells a fixed asset? If your business is buying an asset, it can separately claim for any associated input VAT, but only where the cost of the asset exceeds £2,000 (VAT Notice 733: FRS for small business, section 15). In this instance, any onward sale of the fixed asset would require output VAT to be charged on the full sales proceeds. The treatment differs however if no input VAT was claimed on the purchase, in which case the sales proceeds would form part of the standard FRS calculation. This rule could catch out many business traders if the business car is sold, as the FRS captures all income unless it is outside the scope of UK VAT (which the sale of a car isn’t). To put another spin on it, what would happen if an asset is sold after a business has left the FRS, and no input VAT was reclaimed on the original purchase because the fixed asset cost less than £2,000? The simple answer is that VAT should still be charged on the onward sale, as the FRS percentage applied to the particular business type will have allowed for the input VAT deduction within the original calculation. In other words, there was no input tax block as with the car example described earlier in this briefing, and therefore the sales proceeds are not VAT exempt either, meaning a standard-rated VAT charge should apply.

Property

Land, buildings and property are generally considered the most complex area of VAT law, and the VAT treatment will depend on a wide and varied number of factors, such as whether or not you own the property or you are simply a building contractor, or if the property is a new build, a conversion, or an extension to a standard residential building. Throw into this the much misunderstood ‘Option to Tax’ on land and buildings and you have yourself a very complicated scenario! The advice on this topic is so wide and varied it is too much to consider in this short briefing, but it’s something everyone who owns land or buildings, or is intending to, ought to be aware of. Please get in touch to discuss your specific situation. VAT – whoever named it the Very Awkward Tax was right!