Capital goods scheme ― intervals and adjustments

By Tolley
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The following Value Added Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Capital goods scheme ― intervals and adjustments
  • Overview
  • Intervals
  • First interval
  • Subsequent intervals
  • Final adjustment
  • Calculating the adjustments
  • Intervals and adjustments in specific circumstances
  • Capital items on which expenditure has been incurred pre- and post-January 2011
  • Interaction between CGS and the partial exemption de minimis limit
  • Capital item arising from self-supply of an RRP / RCP building

This guidance note provides details regarding the periods of adjustments and adjustment calculations that need to be undertaken by businesses that have assets that come within the scope of the capital goods scheme (CGS). This note should be read in conjunction with the Introduction to the capital goods scheme and Capital goods scheme ― transfers, disposals and VAT groups guidance notes.

PE67150; 2006/112/EC, Article 187 ; SI 1995/2518, reg 116; HMRC Notice 706/2 ; De Voil V3.470 (subscription sensitive)
Overview

As outlined in the Introduction to the capital goods scheme guidance note, adjustments will only be necessary under CGS where there is a change in the use of the capital item during the adjustment period. Therefore, there will be no requirement to make CGS adjustments where:

  • the item is used solely for making taxable supplies throughout the adjustment period. All the input VAT incurred on the purchase of the item should be recoverable in full (subject to the normal rules)
  • the item is used solely for making exempt supplies or for non-business purposes throughout the adjustment period. The business will not be entitled to recover any VAT incurred in respect of this item.

However, where the use of the item changes over the adjustment period, CGS adjustments will be required.

It should be noted that there was a significant change to the CGS from 1 January 2011 whereby changes in non-business use of the capital item are adjusted via the CGS for items acquired after that date. There was no mechanism for adjusting for changes in non-business use via CGS prior to this date.

Another point of note is that since 1 January 2011, the Lennartz mechanism (full input tax recovery at the time when an asset is purchased, with output tax

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