Introduction to the capital goods scheme

By Tolley
Introduction to the capital goods scheme

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

  • Introduction to the capital goods scheme
  • Goods included in the CGS
  • Books and records
  • Changing methods
  • Additional points to consider

The capital goods scheme (CGS) has been introduced to prevent a business from gaining an unfair rate of input tax recovery on its capital expenditure. The CGS covers land and building capital expenditure that exceeds £250,000 and computer assets, ships, boats and aircraft costing more than £50,000 (excluding VAT).

SI 1995/2518, regs 112116; PE67000; 2006/112/EC, Article 187 ; HMRC Notice 706/2 ; Customs and Excise Commissioners v R & R Pension Fund Trustees[1996] STC 889; VAT and Property, para 13.10; P Charles and T S Charles-Tijmens v Staatsecretaris van Financiën(C-434/03) [2006] STC 1429; De Voil V3.470

See ‘How to apply the Capital Goods Scheme’ by Jackie Yarrow in Tax Journal, Issue 1053, 20 (15 November 2010).

Under the CGS, businesses need to consider input tax recovery on major capital expenditure and it is necessary to consider the use of the item over a five or ten-year period, not just at the time it is purchased. In effect the input tax claimed on the initial purchase is adjusted over a five or ten-year period, which means the capital goods scheme is mainly relevant to businesses making some exempt or non-business supplies. If an asset is purchased and used solely for taxable business purposes in the five or ten-year period adjustment period, the business can recover all of the input tax incurred when the asset was first purchased and will not be required to make any future adjustment. The five-year period applies to computer, aircraft or boat related expenditure and ten years is relevant for land and building expenditure.

If a business only makes exempt supplies then it cannot be VAT registered because it makes no taxable supplies. Therefore, if a business continues to make only exempt supplies throughout the relevant CGS adjustment period, the CGS will

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