The government has announced that the Capital Goods Scheme, under which VAT incurred on expenditure on certain assets, is to undergo a significant simplification and increase from 29th July.
Currently, the CGS applies where VAT has been claimed against the purchase of computer equipment where the capital value is more than £50,000 plus VAT, or land, buildings or civil engineering works where the capital value is more than £250,000 plus VAT.
Under the CGS rules, the VAT amount is recovered according to the intended taxable use of the asset over its lifetime, five years for computers and ten years for land, buildings and civil engineering works. That VAT amount is subject to an annual review and potentially repayable on a proportionate basis if the asset is no longer put to a taxable supply within its lifetime.
So if you buy a building for £300,000 and reclaim the VAT, and then change it to an exempt supply (for example sell it VAT-free after six years), you will have to pay back 40% (i.e. 4/10) of the VAT you claimed on the purchase. The only way of avoiding this would be to opt to tax and charge VAT on the new sale, in which case a new ten-year CGS period would then start for the purchaser (unless they were not VAT-registered, and therefore unable to claim back the VAT element of the purchase).
It also works the other way around, so where the initial VAT recovery is based on an intended taxable use of a property (for example) but that taxable use actually increases, then there may be scope to reclaim a higher amount of VAT than initially calculated.
There are two major changes to the scheme coming into effect on 29th July. The first is that computers and computer equipment will be removed from the list of assets covered by the scheme.
The second is that the threshold for land, buildings and civil engineering work will increase from £250,000 – a figure which has not changed since 1990 – to £600,000. Given the increase in property values over those 36 years, many small businesses were finding themselves subject to complex CGS arrangements; it is hoped that this substantial increase will remove many such transactions from the scope of CGS entirely.
It should be noted that this increase to the CGS threshold only applies to CGS items dated on or after 29 July. For any existing buildings or computers that fall under the CGS rules the previous rates will still apply.
Because the CGS rules affect both taxable and partially exempt business, careful consideration is recommended.