There is an HMRC requirement for all VAT-registered entities, including public bodies, to record details of all capital projects that fall within the Capital Goods Scheme (“CGS”).
The projects that fall under the scheme and the needed details are discussed in more detail below.
The initial VAT recovery on these projects will have been based upon the intended use of the asset, but technically, this recovery is only conditional.
The use of the asset over a defined period (10 years for land or five years for ships and aircraft) will determine whether the VAT recovery is final.
If the use of the asset were to change during this defined period (particularly if the level of exempt use was to increase), there might be a requirement to repay a proportion of the VAT to HMRC.
However, for public bodies, in practice, the potential requirement to repay exempt input tax will only be triggered if the partial exemption de minimis limit was breached during the defined period following the initial spend.
Therefore, the details of these projects are needed to facilitate any potential future adjustments to input tax recovery should there be a change in use.
During reviews carried out for our clients, we often find that the Capital Goods Scheme has not been considered, and therefore, the relevant details have not been recorded correctly. Even if the risk of breaching the partial exemption de minimis limit is low, HMRC would still expect the authority to have a record of the relevant details.
Based on this experience, PSTAX would recommend that the authority identifies whether it holds the records of capital expenditure for the past 10 years and whether there is enough detail behind each project to determine whether the spend supported an exempt activity and what percentage of the spend related to the exempt activity.
We would be more than happy to assist you with this if needed.
What is included in the Capital Goods Scheme?
The assets that are included in the scheme are:
- Land, buildings and civil engineering work
This is if the authority spends £250,000 (excluding VAT) that was subject to VAT at the standard or reduced rate or more on:
- buying land, a building or part of a building or civil engineering work
- constructing a building or civil engineering work
- refurbishing, fitting out, altering or extending a building or civil engineering work
- Computers and computer equipment
The scheme only applies to individual computers or items of computer equipment, that cost £50,000 (excluding VAT) or more.
- Aircraft, ships, boats or other vessels
The scheme applies if the authority spends £50,000 or more (excluding VAT) on purchasing, constructing, refurbishing, fitting out, altering or extending an aircraft, ship, boat or other vessel.
However, the scheme doesn’t apply if:
- the authority acquires assets just for resale
- the authority spends money on assets that have been acquired just for resale
- the authority acquires assets or spends money on assets that it only uses for non-business purposes
It should be noted that the law refers to capital items, not just goods, so it catches standard-rated construction services bought in, not just finished buildings.
What CGS records should be kept?
As well as the standard records needed for VAT, the following records should be in relation to the CGS:
- description of the capital item
- value of the capital item
- amount of VAT incurred on the capital item
- the amount of input tax reclaimed by the authority on the capital item
- the start and end date of each interval
- when adjustments are due
- the date and value of disposal (if the item was disposed of or partly disposed of before the end of the adjustment period)
The authority is not required to keep VAT records for longer than six years. However, the CGS requires adjustments to be made up to 10 years later. Therefore, the authority should keep records long enough to show HMRC how each adjustment was calculated.
Transfer of a going concern (“TOGC”)
The Capital Good Scheme does not cease to apply because an asset is sold in a transaction that is outside the scope of VAT because it is a TOGC. The purchaser of the business must continue the annual adjustments for the balance of the defined periods if appropriate.
This means that the purchaser must ensure that the records transferred include the necessary details of the date of acquisition, the input tax incurred at that time, and the percentage of that tax that the vendor recovered.
It also means that the purchaser may be able to reclaim, or have to pay, some of that tax.
So, please do consider this when purchasing or selling a new asset under a TOGC.
Again, this is something PSTAX will be more than happy to assist with.