Capital goods scheme

advice on the CGS for land and buildings

The CGS applies in three circumstances,

  • Land and buildings acquisitions and works (including refurbishments) costing more than £250,000;
  • computer equipment costing more than £50,000;
  • ships and aircraft acquisitions and works costing more than £50,000

but in practice, Land and Buildings is the most commonly encountered circumstance.

The CGS is a kind of partial exemption and the principle is that the large amount of VAT input tax incurred should be matched against future usage over an “adjustment” period (10 years in the case of land and Buildings and 5 years otherwise) rather than instant usage. If, for example the land and buildings was not used entirely for VATable purposes or generating VATable outputs in that adjustment period, there would be a clawback of a (roughly) proportionate part of the input tax originally claimed. Every year, the amount of clawback of the original VAT input tax is computed for that year Once the 10 year adjustment period is over, there can be no further clawback.

Each Partial exemption year is treated separately and either 1/10th of the input tax is safe or it is clawed back. If the property is sold within the 10 year adjustment period, the remainder of the period outside the ownership takes the character of the final year in ownership. So, a VAT exempt sale in year 6 will result in a clawback of VAT input tax in respect of “exempt” user in years 6 to 10 ie 50% clawback.

Normally the CGS adjustment is specific to the taxpayer who incurred the input tax and on sale the new owner would evaluate the CGS on his acquisition without reference to the CGS position of the seller. However if the sale was a TOGC, the ten year period keeps going as if there had been no sale and the buyer must keep applying the CGS for the remainder of the ten year period. The buyer will step into the seller’s shoes for CGS purposes and the seller will not account for the balance of the unowned period.

There are a number of twists an turns, exemptions etc and, as always in tax, much depends on the facts. Please visit https://www.gov.uk/guidance/vat-capital-goods-scheme-and-capital-assets for further information.

You can download further reading on the Capital Goods Scheme from our publications section.

If you wish to speak to a member of our team regarding this or any area of VAT please contact us on 020 7330 0101 or email abglondon@abggroup.co.uk

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