Capital Goods Scheme

The Capital Goods Scheme (CGS) was implemented to adjust the input tax recovered on the acquisition of certain capital expenditure items that are not entirely used to make taxable supplies.

The scheme recognises that assets can be used by a business over time and that the extent to which the items are used to make taxable supplies may vary over time. It includes a mechanism for adjusting the initial input tax claimed over a 10-year period.

• Computer hardware worth at least £50,000;

• land and buildings, civil engineering works, refurbishments and fitting out works worth at least £250,000;

• ships and aircraft worth at least £50,000 or more are eligible for the scheme.

VAT is not included in the prices.

The scheme excludes assets acquired or expenditure on assets held solely for resale, such as stock-in-trade. However, if an asset is used in the business before being sold, the CGS will apply; if a capital item is sold before being used, it is no longer considered a capital item.

When a capital item acquired under the scheme is acquired, the normal rules for claiming input tax apply, i.e.,

• input tax is fully recoverable if used entirely in making taxable supplies.

• If used entirely in the production of exempt supplies, no input tax is recoverable;

• and if used in the production of taxable and exempt supplies, a portion of the input tax may be claimed under the partial exemption rules.

If the extent of taxable use changes later in a period known as the adjustment period, an input tax adjustment must be made to account for this. If taxable use increases, more input tax can be claimed; if it decreases, some of the already claimed input tax must be repaid.

The scheme also considers fluctuations in the extent to which a capital item within the scheme is used for business versus non-business purposes.

Normally, the adjustment period is:

• In the case of land, a building or part of a building, or a civil engineering work, ten successive intervals;

• In the case of a computer or piece of computer equipment, an aircraft, or a ship, boat, or other vessel, five consecutive intervals.

However, the number of intervals may differ, for example, if a person who registers for VAT previously owned the asset.

The first interval begins on the day the owner uses the capital item for the first time and ends on the day before the start of their next tax year. The tax year is the twelve months that end on the 31st of March, 30th of April, or 31st of May, depending on the VAT periods assigned by HMRC. The VAT recoverable in the first interval is calculated using the standard partial exemption rules.

Subsequent intervals are usually one year long. An adjustment is required when the extent to which a capital item is used in making taxable supplies in a subsequent interval increases or decreases from the extent to which it was used when the original entitlement of the input tax was determined under the partial exemption rules. As an example:

The VAT on the purchase of a property is £300,000, with a 10-year adjustment period. Based on the partial exemption recovery percentage in the first year, 60% of the VAT is recoverable, making the recoverable VAT in the first period £180,000 (£300,000 x 60% = £180,000).

The business must rework the calculation at each subsequent interval, using the original VAT incurred (£300,000) and the difference between the original recovery rate of 60% and the actual recovery rate in the period. In this case, the recovery rate in year two is 70%. This means that the company can reclaim £300,000 (10 x 10%) = £3,000. If the recovery rate in year two was less than 60%, VAT would have been payable rather than recoverable.

It should be noted that where the scheme applies, any adjustments will have an impact on the asset's value for capital allowances purposes (which includes any irrecoverable VAT).

The CGS does not expire simply because the asset is sold in a transaction that is not subject to VAT because it is the transfer of a going concern. The annual adjustments must be continued by the purchaser of the business for the remainder of the adjustment period.

This means that the purchaser must ensure that the transferred records include the necessary details such as the date of acquisition, the input tax incurred at the time, and the percentage of that tax recovered by the vendor. It also implies that the purchaser may be able to reclaim or be required to repay some of the tax, resulting in a reduction or increase in the cost of the asset.

A taxable business will be affected by the CGS only if the business use of an asset changes, or if it begins to make exempt supplies and becomes partially exempt, which includes the exempt sale of an asset within the scheme. This can catch businesses that can normally reclaim 100% of their VAT.

We can start moving toward a conclusion to this conversation now that you have amassed a sufficient amount of knowledge concerning the capital Goods Scheme for VAT that was presented in this blog. There were no activities that were not related to the business at the time that the asset was being purchased, so this does not affect your eligibility for the scheme. In this regard, you need to be aware that in order to be eligible for the scheme, you are required to keep accurate records of the assets that you have purchased.