The Capital Goods Scheme (CGS) can have a very significant impact on the net cost of commercial property. It can impact both the amount of VAT that is recoverable from HMRC on acquisition and the amount of VAT that is payable to HMRC on sale.
The CGS rules apply to capital expenditure on land and buildings where it is in excess of £250,000 (net of VAT). ‘Capital expenditure’ is expenditure which should be categorised as a ‘fixed asset’ for accounting purposes. An asset is a ‘fixed asset’ if it was not acquired for immediate resale and is of ‘enduring benefit’ to a business. For example, a property acquired as rental investment would be capitalised, but a property you build with the intention of selling it on would not. The expenditure that needs to be taken into account includes costs incurred on purchase, construction, alterations or extensions.
Broadly, the initial reclaim of VAT is calculated by taking the total VAT incurred and multiplying that figure by the percentage of the land or building that is used in making ‘taxable’ (vatable) supplies (as opposed to ‘exempt’ supplies). However, the use to which that property is subsequently put must be monitored over a 10-year period and if usage changes; for example, by increasing taxable supplies and reducing exempt supplies (or vice versa), then an adjustment must be made to the owner’s initial recovery of VAT.
A company buys land for £2m + £400k VAT and initially uses the land to make 50% taxable supplies and 50% exempt supplies. Only £200k of the VAT incurred is therefore recoverable at the end of the first VAT period following the purchase. £200k of the VAT cannot be reclaimed at this point because it relates to exempt supplies.
However, 5 years after acquiring the land, the company decides to use the land entirely for taxable purposes and that continues for another 5 years. This enables the company to reclaim a further £100k VAT over the remaining 5 years of the 10 year period.
NB. You may also need to make an adjustment to VAT if the land or buildings are sold within the 10 year period.
It is therefore very important to consider how you will use land and buildings in order to make maximum VAT savings. For a free no obligation consultation please call David Sutton or James Hartley on 0114 266 4432.