Non recoverable VAT on purchase

Sale of assets where the VAT incurred on purchase was not recoverable

VAT Question

My client is partially exempt and some years ago purchased a van that was specifically for the exempt side of their business. The VAT incurred on the van was therefore wholly attributable exempt input tax and was not claimable at all under partial exemption. They are now selling this van. Do they have to account for VAT on the sale?

VAT Answer

HMRC’s guidance advises that where VAT recovery on the purchase of goods was blocked, any subsequent sale of those goods can be treated as exempt by virtue of Item 1 of Group 14 to Schedule 9 of the VAT Act 1994.

This guidance is a little misleading in the use of the term ‘blocked’ as it suggests that this is the case only where VAT recovery was restricted due to a ‘blocking order’, such as the VAT (Input Tax) Order 1992 (SI1992/3222), commonly referred to as the ‘Blocking Order’, which restricts VAT recovery on the purchase of car or on white goods when purchased by property for inclusion with the zero-rated sales of new dwellings.

However, the VAT legislation in Group 14 instead uses the term “non-deductible” and confirms that the exemption also applies where the VAT is restricted by the rules of partial exemption BUT only where the VAT is completely irrecoverable; the exemption in Group 14 doesn’t apply where VAT incurred on goods is only partially restricted by partial exemption and the sale of the goods is thus subject to VAT at the normal taxable rate.

In your client’s case the VAT incurred was wholly restricted by partial exemption and therefore the disposal of the van will be exempt from VAT.