The VAT capital goods scheme affects input VAT recovery that is related directly to high-value capital assets. Read all about it in our latest blog below.
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Input VAT is a type of tax that is incurred on many purchases that VAT registered firms make. However, it can usually be recovered from HMRC in full.
Partially exempt businesses with assets that can be used for both non-business and business purposes can have the capital goods scheme for VAT applied to them.
However, the scheme applies to all businesses that acquire such assets where, at some point during the ‘adjustment period’, the business diversifies into an exempt activity.
This scheme is designed to balance the amount of VAT recovered when the use of the asset, between exempt and non-exempt supplies, in later years varies from that in the year of purchase.
VAT recovered during the adjustment period should be a direct reflection of the actual use of the asset over the period.
The capital goods scheme for VAT also will not at any point apply to assets required for resale, or any used for wholly non-business purposes.
What type of asset does the business apply to?
The scheme currently applies to:
- Land and buildings
- Computer equipment
- Aircraft, ships, boats and other vessels.
What about land and buildings?
This scheme applies to purchases of £250,000 or more (excluding VAT) on the following purchases:
- land, a building or part of a building, or civil engineering work
- constructing a building or civil engineering work
- refurbishing, fitting out, altering or extending a building or civil engineering work.
Any civil engineering work, such as roads, running tracks, golf courses and installation of water pipes.
What are the rules on computer equipment?
The scheme only applies to items bought individually which cost £50,000 or more (again, excluding VAT). Smaller items can have input VAT reclaimed using usual methods.
Computer software and computerized equipment or phone exchanges are not included.
How do I keep records for adjustments?
As you do not have to be partly-exempt or have non-business activities when the asset was purchased to qualify for the scheme, it’s important to keep the correct records for any asset purchase covered by the scheme. Whilst VAT records have to be kept for 6 years, HMRC prefers businesses to keep records for longer as adjustments can be made up to ten years later.
These records allow The Revenue to see how adjustments have been calculated. These records should consist of:
- description of the capital item
- value of the capital item
- amount of VAT incurred on the capital item
- amount of input tax reclaimed by you on the capital item
- start and end date of each interval
- date and value of disposal (if the item was disposed of or partly disposed of before the end of the adjustment period).
The amount of VAT that can be claimed back on any asset falling within the scheme depends entirely on how the asset is used during the adjustment period, such as if it is non-business or business use.
The adjustment period is the time over which the business must review the extent the asset is used in making taxable supplies, measured in intervals.
The number of intervals depends entirely on the nature of the asset. Some examples are:
- five intervals for computers
- five intervals for ships and aircraft
- ten intervals for all other capital items
The first intervals start on the first day the asset is used, ending on the day before the start of the next partial exemption tax year. The following intervals are often in line with the partial exemption tax year.
The input tax is recovered in the first interval in the classic way.
Annual adjustments are necessary for subsequent intervals if the use of the asset differs to that of the first interval.
As such, in some years, businesses may pay extra VAT and in other years they may recover some.
How does the scheme work?
A business has purchased a property for £300,000 excluding VAT of £60,000.
Based on the partial exemption recovery percentage at the first interval, 80% of the VAT is recoverable, meaning the business could reclaim £48,000 of input VAT (£60,000 x 80%).
At future intervals, the business should check if it has incurred all of the £60,000 VAT again and undertake a new calculation.
At the second interval, the building’s use has changed and it’s now wholly used for taxable purposes and will continue to be for the remaining nine adjustment intervals.
The recovery percentage has therefore increased to 100% and the business can reclaim further input VAT under the scheme at each remaining interval of £1,200 ((100%-80%) X £60,000/10).
Nine intervals remain and the extra VAT is reclaimed at the end of each of those to reflect the building’s increasing taxable use.
What are capital allowances?
Purchases of assets that fall within the scheme may be the subject of a capital allowances claim.
In this instance, it should be included within the capital allowances computation at net cost, plus any VAT that cannot be recovered in the year of the purchase.
Scheme adjustments will need to be calculated at each subsequent interval, resulting in a rebate or an extra liability.
The changing amount of the irrecoverable VAT has a knock-on impact on the capital allowances computation.
The general follow-up when this happens is a payment to HMRC, which is treated as an asset addition and a repayment from HMRC is treated as an asset disposal. The date the addition or disposal occurs is the last day of the scheme adjustment period.
When there is first-year allowances or the annual investment allowance was claimed on the asset, these allowances will apply to any scheme adjustment.
What are some potential scenarios?
Because the scheme doesn’t solely apply to partially exempt businesses, some situations can catch businesses out who are familiar with reclaiming 100% of their VAT.
For example, when a business disposes of its premises after six years of owning it, then it is entitled to fully reclaim the VAT.
Having purchased a building for £300,000, the business can then reclaim VAT in full.
However, the property is more than three years old, the sale is classified as an exempt supply. Although, since the sale was exempt from VAT, there is a deemed charge of use from taxable to exempt use.
As such, the amount of input VAT that can be reclaimed on the original purchase changes. As the asset was sold six years into the scheme, 40% of the VAT that is claimed – £24,000 has to be repaid to HMRC.
Having taxable supply of the property can prevent this. VAT needs to be charged on the sale, but none of the previously reclaimed VAT can be brought back.
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