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Introduction

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The Capital Goods Scheme ensures that where businesses acquire or create assets and recover the input VAT from HMRC on the initial purchase upfront, any subsequent change in the entities Taxable sales compared to its total sales (partial exemption recovery rate) is reflected in adjustments to the input VAT initially recovered.  If for example you purchase a computer for £250,000 and recover the VAT in full as your business is only making taxable sales, then the following year your business makes 50% exempt and 50% taxable sales then you will only be able to recover 50% of the VAT as the computer is not being used exclusively to make taxable sales.   So in effect the VAT recoverable on the asset can increase or decrease over the adjustment period depending on the extent of the use of the asset to make taxable sales. 

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Assets Covered by the Scheme

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You’ll have to use the Capital Goods Scheme if you spend £250,000 (excluding VAT) or more on:

• buying 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

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Civil engineering work includes things like roads, bridges, golf courses, running tracks and the installation of pipes for connecting to mains services.

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Computers and computer equipment

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The scheme only applies to individual computers, or items of computer equipment, that cost £50,000 (excluding VAT) or more. It doesn’t cover something like a network where the total cost of the server and all the computers and printers is £50,000 or more but each individual item is less than £50,000. Nor does it cover computerised equipment (for example, a computerised telephone exchange or computer-controlled blast furnace) or computer software.

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Aircraft, ships, boats and other vessels

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The scheme applies if you spend £50,000 or more (excluding VAT) on purchasing, constructing, refurbishing, fitting out, altering or extending an aircraft, ship, boat or other vessel.

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The adjustment periods

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These are:

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• 5 intervals for computers

• 5 intervals for ships and aircraft

• 10 intervals for all other capital items

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Record Keeping

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You’re not required to keep VAT records for longer than 6 years. But the CGS requires you to make adjustments up to 10 years later. You should keep records long enough to show us how you calculated each adjustment.

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Values and definitions

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What does HMRC mean by ‘capital expenditure

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This is normally expenditure capitalised for accounting purposes. We’ll not normally challenge your capitalisation policy for the purposes of the CGS, except in cases of avoidance or abuse.

In some cases charities may incur expenditure of a capital nature on land and property which is not capitalised in their accounts (for example certain heritage buildings or churches). This is generally because the charity does not have unfettered freedom to exploit or dispose of the land or property concerned. This will not prevent expenditure that’s essentially capital in nature from being adjusted under the CGS.

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The value of a capital item

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This is the VAT exclusive value of the item. Only the value of standard or reduced-rated taxable supplies is considered.

Before 1 January 2011, the value of a capital item was determined by reference to the business-related expenditure. With effect from 1 January 2011, the value is determined by reference to total expenditure on an asset. This includes both business and non-business expenditure on an asset.

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Example

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A business purchases a building for £1 million and incurs £200,000 VAT. The building is to be used for 60% business purposes and 40% non-business purposes (for example, charitable use). Before 1 January 2011, £600,000 (60% of £1 million) determined the value for CGS purposes. Under the new rules that took effect from 1 January 2011, all of the expenditure on the building (£1 million) is the value for CGS purposes. As the CGS threshold for buildings remains at £250,000, the building is a capital item in both scenarios.

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Expenditure incurred on a capital item before and after 1 January 2011

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It will be necessary to determine the amount of business-related expenditure incurred on the asset up to 31 December 2010 and the total amount of expenditure (business and non-business) incurred on or after 1 January 2011. If the sum of these amounts exceeds the relevant CGS threshold, the asset falls within the CGS.

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The adjustable amount of VAT

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Prior to 1 January 2011, only VAT on the business-related expenditure on an asset (input tax) fell within the CGS. With effect from 1 January 2011, all of the VAT on an asset (in this instance input tax and non-business VAT) falls within the CGS.

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Example

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Following on from the example, prior to 1 January 2011, input tax of £105,000 (17.5% of £600,000) fell within the CGS. With effect from 1 January 2011, VAT of £175,000 (17.5% of £1 million) falls within the CGS (£200,000 after the increase in the standard rate of VAT to 20% on 4 January 2011).

If expenditure is incurred both before and after 1 January 2011, the VAT on the business-related expenditure incurred up to 31 December 2010 and the total VAT incurred on the asset on or after 1 January 2011 fall within the CGS.

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Estimate the value

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If you do not know if a project exceeds the value threshold for the CGS until all invoices have been received you’ll need to estimate the value of the supplies you’ve received. This may happen with construction projects and refurbishments where VAT is incurred over a period of time and also with contracts that include a retention clause. A retention clause involves a proportion of the contract price being held back and only paid when the work has been satisfactorily completed.

If, when you start the CGS, you estimate that the value of relevant supplies will exceed the value threshold, the item will become a capital item. Even if you find later on that the value does not reach the threshold, the item remains in the scheme and you should continue to make adjustments as necessary.

If you do estimate the value of a capital item you’ll need to keep all the documents you based your estimation on, such as a contract, as our officer may ask to see it.

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What you should include in the value of land or buildings that you acquire

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Only include the value of the interest in the land or building supplied to you, if the supply was taxable and not zero-rated. Do not include any associated costs such as legal or estate agency fees.

In calculating the value of the interest supplied to you in the land or building, you do not need to include the value of any rent or service charges unless it’s:

• been paid or is payable more than 12 months in advance

• invoiced by the supplier for a period of more than 12 months – in that case, you should include the value of rent or service charges when calculating the value of the capital item

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What you should include in the value of a constructed building or civil engineering work

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You should include the total VAT exclusive cost of any of the following supplies made to you:

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• the interest in the land, if the supply to you was taxable (other than zero-rated)

• taxable (other than zero-rated) goods and services supplied for, or in connection with, the construction of the building or civil engineering work

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You should include all the costs involved in making the building ready, such as:

• professional and managerial services including architects, surveyors and site management

• demolition and site clearance

• building and civil engineering contractors’ services

• materials used in the construction

• security

• equipment hire

• haulage

• landscaping

• fitting out, including the value of any fixtures

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4.8 If you’ve purchased land and constructed a building on it

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If you’ve purchased land and constructed a building on it, this is treated as one capital item.

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What to include in the value of an alteration, extension or annex where the value of the

 

Goods and services received is £250,000 or more

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You should include the total value of all taxable (other than zero-rated) goods or services supplied to you for, or in connection with, the alteration, extension or annex.

You should include all the costs involved in making the building or civil engineering work ready. See examples at paragraph 4.7.

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What you should include in the value if a capital item is refurbished or fitted out

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You should only include the value of capital expenditure on the taxable (other than zero-rated) supply of services and of goods affixed to the building or civil engineering work supplied to you for or in connection with the refurbishment or fit out.

However, for capital items where the costs are incurred on or after 1 January 2011 there is no longer a requirement for goods used for the refurbishment to be affixed to the building.

You should include all the costs involved in making the refurbished or fitted out building ready. See examples at paragraph 4.7.

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Goods affixed’ to the building

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These are goods which become part of the fabric of the building. Generally these are items that are sold with the property and are not portable or easily removed.

‘Goods affixed’ does not include items secured for safety or security reasons or computers or computer equipment. These may be subject to the CGS in their own right.

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The following lists will help you to decide if an item is ‘affixed’.

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This list is not exhaustive and the deciding factor is usually if the item becomes part of the fabric of the building. Common inclusions are:

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• materials to build

• internal and external walls

• roofs and ceilings

• floors and hard flooring

• permanent partitioning

• windows

• lifts

• ‘built in’ storage such as cupboards or shelving

• air conditioning

• lighting

• decorative features

Common exclusions are:

• office furniture

• storage unless it’s ‘built in’

• carpets

• computers and computer equipment

• factory and office machinery

Again, this list is not exhaustive.

For capital items where the capital costs are incurred on or after 1 January 2011 there is no longer a requirement for goods used for a refurbishment to be affixed to a building. For capital items where the capital costs were incurred before 1 January 2011, this treatment is already allowed in relation to the ‘goods affixed’ condition by concession and is adopted by most businesses.

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If the refurbishment is in phases

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If you do this you’ll need to decide if the work should be treated as a whole for CGS purposes or if there’s more than one refurbishment. If you think that each phase is really a separate refurbishment then they should be treated separately for CGS purposes.

Normally there’s more than one refurbishment when either:

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• there are separate contracts for each phase of the work

• a contract where each phase is a separate option which can be selected, and each phase of work is completed before work on the next phase starts

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A refurbishment which is only undertaken in phases because the building is occupied and where the contractors work on 1 floor at a time is normally considered to be only one refurbishment.

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Regular refurbishments

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These are sometimes referred to as ‘rolling refurbishments’.

Problems may occur if successive refurbishments begin before each adjustment period has expired. If this happens you should either:

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• treat the original refurbishment as ‘destroyed’ (see paragraph 9.8) if there is nothing left of the earlier refurbishment or this earlier work is stripped out or replaced – the effect of this is that no further adjustments would be required to the input tax on the previous refurbishment

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• continue to make adjustments for the remainder of the adjustment period if elements of the earlier refurbishment are retained

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What to include in the value of computers

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You should include any delivery and installation costs, unless these are supplied separately. If you import a computer you should use the value for VAT at importation. This will include any import duty payable.

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For more information on the Capital Good Scheme please see VAT Notice 

Capital Goods Scheme (VAT Notice 706/2)

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