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

[email protected]

0207 865 2702

Priya Shah

Manager

[email protected]

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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