Updated: Jul 5, 2020
If your business makes wholly taxable supplies for VAT purposes, there is a good chance you may not have needed to consider the complex rules surrounding the interaction of VAT and capital allowances in any detail when the expenditure was first incurred.
This is because a business that makes wholly taxable supplies will normally recover its input tax (e.g. on property refurbishment costs) in full and any capital allowances claim will be based on the net qualifying expenditure involved (i.e. the VAT cost is ignored).
Similarly, if a business makes wholly exempt goods or supplies then it will not be able to recover its input tax and the capital allowances claim will usually be based on the vat inclusive qualifying expenditure amount (i.e. including the irrecoverable VAT liability).
But, what happens when a business needs to diversify, adapt or change. Take the business that refurbished a property which is now surplus to requirements and decides to rent it out to a third party. What was first used for wholly taxable or exempt supplies can become something else and this is where the Capital Goods Scheme (GGS) and VAT Notice 706/2 comes into play.
The CGS adjusts the VAT due if the use of an asset changes during the period of ownership. If the mix of use changes, for VAT purposes, from taxable to exempt a further amount (called an additional VAT liability) is payable by the taxpayer to HM Revenue & Customs (HMRC). This reflects the fact that too much VAT was originally claimed by the taxpayer (based on the initial use).
Conversely, if the mix of use changes, for VAT purposes, from exempt to taxable a higher proportion of the input tax originally incurred by the taxpayer (called an additional VAT rebate) is payable by HMRC to the taxpayer.
The VAT Capital Goods scheme applies to computers and computer equipment worth £50,000 or more (and applies over the first 5 years of the asset’s life) and to land and buildings worth £250,000 or more (over a 10-year period).
Whenever a business has an “additional VAT liability” the capital allowances rules can allow a claim based on the corresponding proportion of the original qualifying expenditure involved. When a business has an “additional VAT rebate” the same principles will seek to bring a disposal value into account (i.e. reclaim the proportionate qualifying irrecoverable VAT claimed).
The ‘additional VAT liability’ or “additional VAT rebate” is calculated by reference to the taxable supplies made in the adjustment periods involved.
For buildings the normal period of adjustment is 10 years (as indicated above) which equates to 10 interval adjustments. However, if the business has a shorter interest in the asset (e.g. 7 years), the period of adjustment for the building is reduced to the number of complete years plus 1 (i.e. 8 intervals). If your interest in an asset is for fewer than 3 intervals, then the asset is unlikely to fall within the CGS.
To administer CGS correctly it is essential that businesses, regardless of taxable supplies, keep accurate records and HMRC recommend the following:
Description of the capital item
Value of the capital item
Amount of VAT incurred on the capital item
The amount of input tax reclaimed by you on the capital item
The start and end date of each interval, including the first when adjustments are due
The date and value of disposal (if the item was disposed of or partly disposed of before the end of the adjustment period)
And, if you find yourself with “an additional VAT rebate” or “additional VAT liability” don’t forget about the need to adjust your corresponding capital allowances computation accordingly.
If you have any questions or would like more details, please do not hesitate to get in touch here.