V6.323 VAT recovery

V6.323 VAT recovery

Input tax on new dwellings

Although the first grant of a major interest in a dwelling is zero-rated, housebuilders are not able to recover all the VAT they incur on building such a dwelling. As an anti-avoidance measure, intended to ensure that the final consumer does not acquire certain domestic fixtures and fittings free of VAT, housebuilders are not able to recover VAT on some items which are sometimes supplied as part of a new house. In the main, these non-recoverable fixtures and fittings are fitted furniture, some electrical appliances and carpets. (See V6.196–V6.201 Construction Industry for a more detailed explanation.)

Capital Goods Scheme

The Capital Goods Scheme (CGS) was introduced by HMRC to deal with the very real problem of input tax incurred on an asset which was used to make both taxable and exempt supplies, and the usage fluctuated over the life of the asset. It was intended to ensure that businesses could not acquire large capital assets, recover the input tax on the grounds that they (initially) made taxable supplies, and then change the use of those assets to make exempt supplies whilst retaining all of the VAT originally incurred. This, once again, was the “first supply rule” rationale where, if the first supply was a taxable supply, the input tax was recoverable, and subsequent exempt supplies had no effect on the input tax recovery.

The CGS covers the following property transactions—


    —     land, a building or part of a building or civil engineering work or

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