Capital Goods Scheme VAT Guide

The introduction of the Capital Goods Scheme (CGS) is intended to help adjust the input tax recoverable from the purchase of particular capital items that may not be fully employed in the production of taxable supplies.

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The good thing about the scheme is that it acknowledges that a business may use some assets over several years and there may be differences over the years on how the capital items are employed in the making of taxable supplies. It thus offers a mechanism through which a business may adjust the original input tax claimable over a period of up to a decade.

Assets that may be adjusted on the scheme include:

• Computer hardware worth at least £50,000
• Civil engineering works, fitting out works, refurbishments, buildings, and land worth at least £250,000
• Aircraft and ships worth £50,000 or greater

VAT is not included in the valuation.

The scheme is not applicable to expenditure or assets a business acquires with the intention of resale. Nonetheless, the CGS may come into play if the business uses the asset before selling it on. On the other hand, the item will not be deemed an item of capital if it is traded before it can be used.

The acquisition of a capital item that qualifies for the scheme means that all the rules for input tax are applicable. These include:

• Input tax has to be recovered in full for all items used fully in the production of taxable supplies
• Input tax is not recoverable if the item is used in full to make tax-exempt supplies
• A business may claim a percentage of the input tax according to the partial exemption regulations, if the capital item is used to produce a mixture of exempt and taxable supplies. 

Subsequently, an input tax modification needs to be made if there are any changes to the degree of taxable use during the adjustment period. If the taxable use goes higher, the business may claim more input tax and if it goes down, it may have to repay a portion of the input tax that had been claimed. 

The scheme will also take into considerations the degree to which the item that qualifies for the scheme is employed for non-business or business ends. 

The typical adjustment period is:

• Ten consecutive intervals in the instance of part of a building, land, civil engineering or part of civil engineering works. 
• Five consecutive intervals if the item is a boat, ship, aircraft or other vessel or computer or related computer equipment.

Nonetheless, the intervals may vary, for instance if a business owned an asset before registration then registers for VAT, the first interval will be deemed to have started on the day of first use of the capital item and will end before the beginning of the following tax year. The tax year typically ends on 31^st March, 31^st May or 30^th April and is 12 months long. The HMRC will allocate the VAT periods as it sees fit for each business. First interval VAT is computed according to the typical partial exemption regulations. 

Subsequent intervals will typically run for a year. Where the degree to which the item may have been employed in the production of taxable supplies in a succeeding interval goes lower or higher, from the degree to which it was employed at the time of the original claim of the input tax was calculated using partial exemption regulations, the tax would have to be adjusted. For instance:

The acquisition of property results in VAT of £300,000 and 10 years is the adjustment period. According to the partial exemption recoverable ratio, 60% of the VAT will be recovered in the first year, and hence the recovered VAT is (£300,000 x 60%) = £180,000.

The business will then have to work the VAT for each subsequent interval using the initial VAT amount of £300,000. They will then use the difference between 60% which is the initial recovery rate and the subsequent recovery rate. For instance, subsequent recovery in the second year is 70% which means that the business may reclaim £300,000 ÷ (10 x 10%) which comes to £3,000. In the instance of the percentage in year two being lower than the initial 60%, the business would have had to pay more VAT rather than recover amounts paid.