The Government has proposed some simplifications to the VAT Capital Goods Scheme.

These include the increase of the threshold for the scheme for land and buildings being raised from £250,000 to £600,000 and the removal of computers and computer systems from the scheme altogether.

At present it is not known when the simplifications will apply as the Government’s statement says that they will come into force “at a later date within this parliament”.

However, any changes that simplify the Capital Goods Scheme are to be welcomed as the scheme provides many traps and pitfalls for businesses.

Indeed, many businesses are unaware of the scheme.

At present, a land or a building can be a Capital Good if it is purchased, extended, or refurbished at a cost including VAT which equals or exceeds the Capital Goods Scheme threshold.

VAT is recovered in respect of a ‘Capital Good’ based on the extent that it is used for taxable business purposes. 

However, this VAT recovery is only provisional, with the result that if the taxable use of the Capital Good changes over the life of the asset (10 years in the case of property), then the VAT recovered might become repayable to HMRC.

A significant ‘trap’ in respect of the Capital Goods Scheme is where a business uses a property in its taxable business to trade from but does not realise that a subsequent sale of the property without taking further advice could have VAT recovery implications. 

For example, if a business buys a shop premises to trade from it will be entitled to recover the VAT in full. 

However, if five years later it outgrows its premises and decides to sell the property, it might have to repay half of the VAT that it has previously recovered if the sale is made without taking further action to ensure that VAT is chargeable on the sale.

It might also be the case that a business buying a property as a ‘Transfer of a Going Concern’ inherits the ‘Capital Goods Scheme’ position from the vendor, so that in a worst-case scenario, a business could even find itself paying back VAT originally recovered by someone else.

On this basis, any changes which reduce the likelihood of a property getting caught by the Scheme will be seen as helpful.

If you need support or guidance regarding the Capital Goods Scheme or how VAT can be recovered in respect of the purchase, extension, renovation or refurbishment of a property, then please contact our specialist VAT Team.