Reclaiming VAT on Flat Rate Scheme

Neil_highland

I run a B&B and we are VAT registered using the FRS. I am trying to work out if it is fair, especially when it comes to reclaiming VAT on capital purchases over £2k. As I understand it, for example, my Net income under the FRS is gross income less VAT paid. So if my VAT inclusive income is £100k my income for P&L purposes is £89,500 (FRS for B&B is 10.5%). And let's say my costs are £50k, this gives me a taxable profit of £39,500.
Now say I have total capital expenses of £6000, of which VAT is £1000, if I reclaim this £1000 my net income therefore increases by £1000 to £90,500. AND as far as I understand it, for P&L purposes, the amount I can claim for these capital expenses is the net figure of £5000.
Therefore Income increases to £90,500 and expenses reduces by £1000 to 49,000 now giving me a taxable profit of £41,500, which is an increase of £2000, which is taxable.
Is this right? It doesn't seem fair to me.

Pennywise

You're double counting the £1k. You don't add it to turnover AND deduct it from expenses. Leave the turnover figure alone, it's gross less FRS VAT unchanged. The capital purchase is gross less VAT reclaim.

TheCyclingProgrammer

Pennywise wrote: »

You're double counting the £1k. You don't add it to turnover AND deduct it from expenses. Leave the turnover figure alone, it's gross less FRS VAT unchanged. The capital purchase is gross less VAT reclaim.

This. For anything you deal with outside of the FRS (such as capital purchases over £2k), the VAT has no impact on your P&L. Use the net amounts everywhere - the input and output VATs are simply entries in your VAT account and the difference is paid to HMRC.

polymaff

Neil_highland wrote: »

... total capital expenses of £6000, of which VAT is £1000, if I reclaim this £1000

It doesn't work like that. You are only able to claim on single purchases which are £2,000 or more, not on your total capital expenditure.

TheCyclingProgrammer

polymaff wrote: »

It doesn't work like that. You are only able to claim on single purchases which are £2,000 or more, not on your total capital expenditure.

Good spot - OP you can purchase multiple capital items totalling over £2k but it does have to be a single purchase of goods, or an individual item over £2k on its own.

Watch out for online purchases that sometimes split a single purchase of goods across multiple invoices (usually because they are dispatched separately) - my accountant tells me this would be fine so long as you can clearly show they are all one purchase (e.g. a purchase order or order confirmation to go along with the VAT invoices showing they are linked).

Also - it must be a purchase of goods, services do not count.

polymaff

Well, it is only one interpretation of what the OP has written and it might be wrong, but I have heard of this sort of procedure being attempted before. If correct in this case - and particularly if this has been the OP's continuing practise - then watch out for HMRC, too. They're very hot on FRS abuse.


I guess that that is a result of how much - in their eyes - FRS has been exploited in the past by "limited cost businesses".