Is the sale of old equipment VATable?
John sold a machine which he had used in his business before he was VAT registered. He was told that he should have charged VAT on the sale and that he must now account for it out of the proceeds. Is this true? Partner Kevin Ferguson discusses in this article.
When a VAT registered business sells an asset, the VAT treatment depends on several factors, including what type of asset is sold. In this article we are only looking at the sale of equipment, and in this case, an item of machinery.
Generally, where you have used an item of machinery for your business, you must charge VAT (output tax) if you sell it. This is whether or not you reclaimed VAT when you bought it. It’s a common misconception that you don’t need to charge VAT on the sale if you didn’t reclaim it on the purchase.
However, there is a limited exemption which applies where the input tax is specifically blocked by the rules.
Blocked VAT
Input tax paid on the types of goods or services listed below is not reclaimable (blocked). For some other types of purchase input tax is not fully blocked, instead the VAT recoverable is limited to the difference between purchase and sale cost, i.e. the margin or profit. If you sell an item on which the VAT was blocked, the sale is VAT exempt.
This list shows items where input tax is blocked:
• Cars – purchased or leased
• Goods installed in dwellings in the course of construction
• Private imports
• Services and goods acquired by tour operators
• Goods related to the supply of accommodation to a company director
• Goods and services acquired under a margin scheme, such as the second-hand goods scheme
• Business entertainment
EXAMPLE 1
ABC Ltd purchased a brand new van several years before it registered for VAT. The input tax could not be reclaimed at the time of purchase nor when ABC registered for VAT (because such a claim is time limited to four years). The input tax was not blocked, it’s simply that ABC was not entitled to reclaim it, therefore the exemption doesn’t apply and so when ABC sells the van it must charge VAT.
EXAMPLE 2
DEF Ltd bought a yacht solely to provide business entertainment and so the VAT input tax is not deductible (it’s blocked). Note, it does not hire out the yacht for customers to use for entertainment purposes. That would be a VATable supply and would mean DEF could reclaim the input tax. The sale of the yacht by DEF is exempt.
EXAMPLE 3
XYZ Ltd purchased a piece of machinery and has not reclaimed the input tax it paid as it expects it to be used for exempt supplies. In practice the machine is used for both exempt and VATable supplies. XYZ now intends to sell the machinery. Because the machinery was used for both taxable and exempt supplies the input VAT was not entirely blocked. Therefore, XYZ must charge VAT on the full sale price.
SUMMARY
To answer the original question in the introduction, VAT must usually be charged on assets sold after registration even if they were bought previously. There are exceptions to this rule. Where the VAT was not deductible, e.g. for a car available for private use so that VAT recovery is blocked, the subsequent sale of the asset is VAT exempt.
Contact the JRW Hogg & Thorburn team for any VAT related queries you may have.
