Plans to simplify VAT capital goods scheme

VAT value added tax

The government has launched a consultation on simplifying VAT on capital assets to reduce the administrative burden of capital goods scheme (CGS) compliance

Partial exemption and the capital goods scheme (CGS) apply to VAT on capital assets and can involve a significant amount of administration for businesses, the government said, often requiring complex calculations to determine the amount of input tax that businesses can recover from the sale of assets.

Some businesses which make both taxable and exempt supplies incur input tax that cannot be attributed solely to either. This residual input tax is subject to a calculation to determine how much of it is recoverable, a process that also applies to the sale of capital assets. This is known as a partial exemption but requires the business to submit a statement of partial exemption special methods (PESM) for HMRC approval, a process that places a burden on the business and HMRC.

The government is now consulting on how partial exemption special methods can be simplified and is also review the current partial exemption de minimis limit which was introduced in 1994 and has remained unchanged at £625. The de minimis limit was introduced by EU legislation and allowed businesses to ignore insignificant amounts of input tax on exempt supplies.

And the government is looking at ways to simplify adjustments caused by the CGS, a scheme which allows businesses to make adjustments over time to the initial VAT recovery related to the purchase of specific types of capital items. While the recovery of VAT on these items is made once, in the year it was purchased, adjustments must be made in subsequent years depending on the proportion of taxable use of the asset. Administering the CGS can be burdensome, the government admits, and some of the underlying assumptions of the scheme are out of date.

In most cases, when an asset is purchased, the amount of input tax recovery permitted is fixed in the year in which the purchase takes place, according to Croner-i tax writer Sarah Kay. However, she says that for certain high-value assets, which are subject to the CGS, input tax recovery must be adjusted over the first five to 10 years of its ownership. If the asset is sold before the scheme expires, significant VAT payments or repayments may be incurred.

CGS affects land and buildings involving more than £250,000 in capital expenditure and single items of computer equipment, planes, ships and other vessels involving more than £50,000 capital expenditure.

The CGS is intended to prevent businesses purchasing a long-life asset to use it mainly for exempt purposes but enjoy full input tax recovery by using it for taxable purposes when first bought.

In a report published in November 2017, the Office of Tax Simplification (OTS) said that HMRC should simplify partial exemption and CGS as businesses often spent a long time administering a scheme which yielded only a small adjustment.

HMRC is also interested in feedback on how partial exemption and CGS could be streamlined with Making Tax Digital.

The consultation closes for comment on 26 September 2019.

HMRC call for evidence: simplification of partial exemption and the Capital Goods Scheme

Sarah Kay: Tax implications of selling assets before capital goods scheme expires

Tom Reeve | 22-07-2019

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