Recovery of expenditure on racing car

Flat rate scheme users can claim input tax on capital expenditure goods that cost more than £2 000 including VAT. The taxpayer claimed input tax on the cost of parts labour and consumables to build an improved engine for a racing car owned by the company. It had been VAT-registered since 2007 and approved to use the flat rate scheme.

HMRC refused the claim saying the items did not meet the definition of capital expenditure goods. This was because the car was not used for the purpose of the business; many of the costs included labour which is a service not goods; fuel and oil were not capital items; and the engine did not qualify as capital because it was replacing another engine in the vehicle.

The First-tier Tribunal agreed with HMRC that the car was the capital item not the engine. Therefore the expenditure was...