My client has a business hiring out bouncy castles. He is looking to buy a new deluxe inflatable which costs £2,495 incl. VAT. He is also buying a new commercial van on hire purchase for £25,375 incl. VAT to deliver these inflatables to his customers. Can he reclaim the VAT as he is on the Flat Rate Scheme (FRS)? The FRS is a ‘special scheme for small undertakings’ and operates under a special provision of Council Directive 2006/112/EC (Article 281). If your client uses the FRS they are generally not able to recover any input VAT. However, there are special rules allowing your client to reclaim input VAT on a single purchase of capital expenditure goods as long as it is one purchase and shown all on the same invoice, is for £2,000 or more incl. VAT and is not for services. A single purchase can include a package of items bought as one purchase e.g. a computer package. Capital goods are defined as goods which are bought to be used in the business and not resold such as vans, computers, machinery and equipment. They cannot be incorporated into other goods to be sold. They must have a lifespan of more than one year. They must not be leased, let or hired out… and finally they must not come under the Capital goods scheme. The commercial van bought under hire purchase for £21,375 incl. VAT is treated as a capital expenditure good as ownership will eventually transfer to the business. It is worth noting here that if the van was leased or hired to the business then because the ownership will never transfer to the business this is seen as a continuous supply of services and not a capital good. In this situation input VAT is not recoverable. The input VAT on the purchase of the commercial van (as long as the van is not hired out in its own right) is shown on the VAT return in Box 4 and the net amount in box 7. When the commercial van or any capital expenditure goods are eventually sold output VAT must be accounted for at the VAT rate applicable at the time of sale (currently 20%) and not at the flat rate percentage. The recovery of input VAT on purchasing the inflatable is not allowed as it will be hired out. The special rule on a single purchase over £2,000 incl. VAT described above does not apply in this situation and there is a specific exclusion which blocks the recovery of input VAT incurred when buying capital goods used to generate business income by leasing, letting or hiring them out. This purchase will not be shown on the VAT return. More information is available in VAT Notice 733 Flat Rate Scheme for small businesses, section 15.