Disposing of a capital goods scheme item

The capital goods scheme (CGS) is designed to adjust the amount of VAT claimed on a capital item during the ‘life’ of an asset to reflect its taxable business use. The CGS applies to certain commercial property, some computer hardware and certain ships, boats and aircraft, and adjusts for taxable or exempt and non-business use of the capital asset.

The adjustment period for property is ten years, and five years for other items. For most businesses, the real impact of the CGS applies to commercial property over £250,000 on which VAT has been Recovered.

Disposing of a capital item

If a business sells a capital item before the end of the adjustment period, the adjustment for the interval in which it is sold will be the final adjustment for that item and must include all adjustment amounts for any remaining intervals.

To work out the final adjustment:

1. For the interval in which the business sells the item, it should work out the adjustment amount in the normal way.

2. For any remaining complete intervals in the adjustment period, the capital item is treated as being used, taxable (at 100%) if the sale was a taxable supply and exempt (0%) if the sale was an exempt supply.

If a business is selling a building subject to the CGS partway through the adjustment period, it should opt to tax it to ensure that it does not have to repay a proportion of the input tax that was originally reclaimed. This can catch out a normally fully taxable business that decides to sell its trading premises. Without opting to tax, a large amount of VAT may need to be repaid to HMRC. For example, a fully taxable business buys a property for £500,000 plus VAT of £100,000, which it reclaims in full.

If it decides to sell the property after five years without opting to tax, it would need to repay half the VAT it reclaimed (half way through the ten-year adjustment period) as the sale would be an exempt supply and the remaining five years of the CGS adjustment period will be treated as entirely exempt. By opting to tax, it will create a taxable supply and there will be no clawback of the VAT already reclaimed.

If a business is partly exempt and could not recover all the VAT at the time of the purchase and sells it as a standard-rated taxable supply (if it was a property having opted to tax it), then there could be an extra recovery of VAT on the original purchase. If a business disposes of a capital item as a transfer of a going concern, it will need to give the new owner the details of the capital item so that future CGS adjustments can be made. The new owner must continue making the CGS adjustments for any remaining intervals.

Deregistering from VAT

If a business with a capital item deregisters for VAT, it is treated as making a deemed supply of any items on hand, including items covered by the CGS. The date of deregistration is treated as a disposal of the CGS item, and it is therefore possible that there may be a clawback of VAT already claimed if the deemed supply is exempt from VAT.

Part disposal

If a business makes a part disposal, it is required to carry out a final adjustment in relation to the VAT on the part disposal and is only required to carry out adjustments in relation to that part of the capital item which it still owns.

Practical tip

If a business owns a capital item covered by the CGS and sells it during the adjustment period, it will have to carry out a CGS adjustment. If the sale is exempt from VAT, it will need to repay some of the VAT already claimed.