Capital Goods are developed property and they can be used to calculate VAT on taxable supplies However, you might be wondering what is a Capital Goods Scheme (CGS) for VAT and how it works.
Capital Goods Scheme deals specifically with the goods that have been purchased with the intention of using them in your business. However, when it comes to calculating the VAT, this same Capital Goods Scheme becomes tricky for many.
The reason for this complexity is the spread of VAT reclaimed over the life of capital goods and these capital goods have been switched from personal use to business purposes or vice versa. In this blog, we will discuss what Capital Goods Scheme is and how we can use this for VAT. So, let’s delve deep into this discussion!
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What is a Capital Good?
Capital Good is any good bought with the intention to be used in the production of goods and services. For example, heavy machinery, computers, equipment,s and other tools. In other words, capital goods help produce income for entrepreneurs or businesses.
When you do expenditures on the purchase of capital goods or assets, you can reclaim the VAT from the HM Revenue & Customs (HMRC). If you use capital goods only for business purposes, reclaiming VAT is easier to calculate.
What is Capital Goods Scheme (CGS)?
The Capital Goods Scheme has been introduced for the purpose of calculating VAT on capital goods. It calculates VAT on the overall lifespan of a capital good. Sometimes, capital goods are used for business purposes and for personal needs other times. So, Capital Goods Scheme is the right way to determine the accurate amount of VAT you can reclaim.
CGS allows you to reclaim VAT if you have added more taxable supplies or you have to pay back the VAT if the taxable supplies have been reduced over the number of years. There is one more concept that needs to be clarified to better understand taxable supplies.
What are Taxable Supplies?
The taxable supplies are those supplies which are under the VAT and are not exempted from Value Added Tax (VAT). If these supplies have been made in the United Kingdom, you can reclaim VAT on these taxable supplies over the lifetime of capital goods.
Taxable supplies that are zero-rated or reduced-rated are recoverable and you can reclaim VAT on these supplies.
Capital Goods Scheme (CGS) Assets
Not all the assets purchased are considered as a part of the Capital Goods Scheme. For this, the HMRC has specified three categories of assets to make things easier for businesses to calculate VAT refunds.
- land, buildings and civil engineering work
- computers and computer equipment
- aircraft, ships, boats or other vessels
All of these assets are expensive capital goods and they are taxable supplies. You can reclaim 100% of the VAT if you use these assets only for the purpose of making taxable supplies only. On the contrary, you can recover VAT partially if you use these assets for business and non-business activities. For this, partial exemption calculations and the VAT for non-business helps considerably.
CGS For Land & Buildings
The Capital Goods Scheme is applied where the total expenditures have crossed the threshold of £250,000. These expenditure does not account for the VAT. All the expenditures on the land, construction or renovation of the building or part of it can be reclaimed for VAT.
CGS For Computer & Computer Equipment
If you have purchased computer equipment of £50,000 or more individually and not as a part of other computer equipment, you can calculate Capital Goods Scheme for VAT. Software and other computerised items are not part of this scheme. The expenditures are not VAT included.
CGS For Ships and Aircraft
Making expenditures of £50,000 or more on the purchase, repairing and modifying or extending the vessels, boats, ships and aircraft also are recoverable as a part of CGS. This cost is VAT excluded.
Capital Goods Scheme Adjustments
The adjustments under Capital Goods Schemes depend on the number of intervals and the extent of use of the capital goods for the taxable supplies. Following are the intervals for different categories:
- Five intervals for computer and equipment
- Five intervals for ships, aircraft, vessels and boats
- Ten intervals for all other capital items like buildings and land
The adjustment period begins with the purchase of capital goods and ends before the start of non-business use of the equipment.
Capital Allowance
There is another possibility of claiming a capital allowance when you buy or spend on the purchase of capital goods. In that case, you will include all the VAT reclaims and net cost as a part of the capital allowance.
At the end of each interval, the scheme adjustments must be calculated accurately to get a refund or make a liability to HMRC.
The Final Thoughts
Above all, the accurate record of capital goods and capital allowances can help determine the right amount of VAT recoverable. On the other hand, Capital Goods Scheme has been introduced to make adjustments in the VAT reclaimed over many years.
So, it is essential to understand the intricacies involved in this scheme for VAT purposes. For this, you need to understand the intervals, adjustments and capital allowances as they affect considerably the VAT under the Capital Goods Scheme in the United Kingdom.
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Disclaimer: All the information provided in this article on Capital Goods Scheme, including all the texts and graphics, is general in nature. It does not intend to disregard any of the professional advice.