VAT Club: UK - Capital Goods Scheme briefing

© 2015 Grant Thornton UK LLP. All rights reserved.
Capital Goods Scheme
16 September 2015

Contact details
Rhys Morgan
Associate Director
rhys.morgan@uk.gt.com
0207 865 2702
Priya Shah
Manager
priya.shah@uk.gt.com
0207 728 3111

Agenda
Introduction
Why does CGS matter?
Does CGS apply to me?
• Fully taxable businesses
• Non-business implications
• Work done in stages
Examples
Any Questions?

Introduction
• If a business incurs VAT on purchases that are used to make taxable supplies then it will
recover the VAT as input tax.
• Similarly, where a business incurs VAT on purchases that are used to make exempt supplies
then this will be blocked from recovery.
• Where there is a mix of supplies, it follows that there is partial recovery.
• The above is the basis of partial exemption.
• The Capital Goods Scheme involves assets that you are using in your business over an
extended period of time.
• If your use changes – you may need to adjust.
• The VAT recovery is effectively "spread" over the life of the asset.

Why does CGS matter?
• The CGS means that you need to consider the use of an asset over an extended period of
time:
- 10 intervals (years) for land and property,
- 5 intervals (years) for computers or vessels.
• An adjustment calculation will need to be carried out for the full adjustment period. There
may be additional monies to be either paid back to HMRC or to recover from HMRC.
• Consideration needs to be given to VAT records. Usually records are only required to be
kept for 6 years, however, you may need to make adjustments (and be able to show proof
of those adjustments) for 10 years.

Which assets fall into CGS?
• Land, buildings and civil engineering works valued at £250,000 (exclusive of VAT) or
more;
• Most property related capital expenditure (e.g. refurbishments, extensions etc.) valued at
£250,000 (exclusive of VAT) or more;
• Any single item of computer equipment valued at £50,000 (exclusive of VAT) or more;
and
• Any aircraft, ship, boat or other vessel valued at £50,000 (exclusive of VAT) or more.
This is from 1 January 2011 only

• Exceptions:
− Property held out for sale (i.e. stock/current assets)
− Exempt/zero-rated purchases as no VAT was charged
− Series of refurbishments when each one is below £250,000

Example 1
A Limited refurbishes its office for £210,000 plus £42,000 VAT.
Is this a capital item for CGS purposes?
This is not a capital asset as the cost (exclusive of VAT) is only £210,000 and therefore is not
seen to be of high enough value for the scheme.

Does CGS apply to me – my business is
fully taxable?
• CGS applies where you have capital assets, regardless of whether your business is fully
taxable or not.
• In all cases it is important that records for CGS items are kept in case of sales etc.
• The office refurbishment is over £250k, and VAT would been charged on it. This is a
Capital Asset for CGS purposes.
• The business diversifies in year 5 meaning that, from year 5 CGS adjustments will be
required.
• This example will result in monies becoming due to HMRC as A Limited has gone from
being fully taxable to partially exempt.
Example 2
B Limited is a fully taxable consulting business that refurbishes its offices for
£275,000 (exclusive of VAT) in 2011.
In 2015 its business diversifies into exempt financial services.
How does CGS affect this?

Does CGS apply to me – my company
has non-business use of assets?
• From 1 January 2011, CGS has applied to all Capital Assets, regardless of whether they are
used for business or non-business purposes.
• If you incurred VAT on a Capital Asset prior to 1 January 2011 for non-business purposes
then a business may have undertaken an adjustment under Lennartz.
Example 3
C Limited is a charity, limited by guarantee, that has refurbished its headquarters at a cost of
£300,000 (exclusive of VAT). At least 25% of its office space is used solely for non-business
purposes. This work has been carried out in 2013.
• The office refurbishment is over £250k, and VAT would been charged on it. This is a
Capital Asset for CGS purposes.
• The total cost of the asset will fall under the CGS, regardless of whether it is being used for
a business or non-business purpose.

Does CGS apply to me – the work has
been done in stages?
• You will need to consider whether the work (e.g. refurbishment) has genuinely been done
in stages or whether it is a series of different works.
• HMRC consider that there is normally more than one refurbishment when:
• there are separate contracts for each phase of the work; or
• 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.
• However, a refurbishment which is only undertaken in phases because the building is
occupied and where contractors work on one floor at a time is normally considered to be
only one refurbishment.

Does CGS apply to me – the work has
been done in stages?
Example 4
D Limited is a media firm that is in the process of refurbishing its office in Central London.
Owing to space restrictions, this work is being carried out on a floor-by-floor basis and will be
invoiced once each floor is complete.
The works were commissioned under one contract and will cost:
- Reception and floor 1 - £95,000
- Floor 2 & 3 - £155,000
- Changes to roofspace - £5,000
• The works will be seen as being one single refurbishment as it is only being undertaken in
phases because of space constraints.
• The work has been commissioned under a single contract.
• This is therefore a capital asset for CGS purposes.

How do CGS adjustments work?
Land and Buildings example
• When looking at the actual CGS adjustments, it must be considered that the adjustments
take place over a period of 10 years (5 for other types of assets).
• The first adjustment is always a partial exemption adjustment, as usual, in the year of
purchase or use. There are specific rules, depending on the CGS asset, as to when the
CGS 'clock' begins.
• All following adjustments will be as part of a CGS adjustment.
• Let's look at an example………….

CGS Calculation Example
Year Taxable Income Exempt Income Total Income
2011 £500,000 £500,000 £1,000,000
2012 £400,000 £600,000 £1,000,000
2013 £600,000 £400,000 £1,000,000
2014 £550,000 £550,000 £1,100,000
2015 £500,000 £600,000 £1,100,000
Example 5
E Limited is a financial services provider, that has a mix of both taxable and exempt supplies.
It moves offices in 2011 and refurbishes these offices at a cost of £500,000 plus VAT at 20%.
The firm historically has a fairly constant ratio of taxable to exempt income, though there are
slight variations each year.
What is the CGS treatment for each year, up to 2015, assuming the following ratio of income.
Please note E Limited used the standard, income-based, method of partial exemption.

Year One – 2011
The firm has incurred £100,000 of VAT in relation to the refurbishment. This is all residual to
the business.
PE% = taxable income / total income
£500,000 / £1,000,000
50%
Recoverable residual VAT = £100,000 x 50%
= £50,000
Year Taxable Income Exempt Income Total Income
2011 £500,000 £500,000 £1,000,000

Year Interval VAT
incurred
PE
%
Input Tax
Claimed
CGS
baseline %
VAT to be
adjusted
CGS adj. % CGS adj.
amount
2011 1 £100,000 50% £50,000 50% n/a 0 0
2012 2 Nil 40% 50% £10,000 40% 4,000
2013 3 Nil 60% 50% £10,000 60% 6,000
2014 4 Nil 50% 50% £10,000 50% 5,000
2015 5 Nil 45% 50% £10,000 45% 4,500
2016 6
2017 7
2018 8
2019 9
2020 10

CGS Calculation Example – short lease
Example 6
E Limited, a partially exempt business, incurs £500,000 plus VAT on a short lease premium to
be used as a new office building (term of 7 years, 6 months). A partial exemption special
method was agreed with HMRC.
Let’s see the CGS calculation adjustments …
Year Interval VAT Incurred PESM % Input Tax
Claimed
CGS
Baseline %
VAT to be
adjusted
CGS adj. % CGS adj. amount
2012 1 £100,000 25% £25,000 25% N/A 0 £0
2013 2 Nil 20% Nil 25% £12,500 -5% -£625
2014 3 Nil 15% Nil 25% £12,500 -10% -£1,250
2015 4 Nil 30% Nil 25% £12,500 5% £625
2016 5 Nil TBC Nil £12,500
2017 6 Nil TBC Nil £12,500
2018 7 Nil TBC Nil £12,500
2019 8 Nil TBC Nil £12,500

Any Questions?

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VAT Club: UK - Capital Goods Scheme briefing

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