Capital assets - the Capital Goods Scheme for adjusting VAT reclaimed

If you're a VAT-registered trader and you acquire or create an expensive capital asset, or you have one when you first register for VAT, you may have to use the Capital Goods Scheme to make adjustments, over several years, to how much VAT you initially reclaimed on the asset. The scheme applies when you spend, net of VAT:

  • £250,000 or more on land, buildings, or civil engineering works
  • £50,000 or more on a single computer or piece of computer equipment
  • £50,000 or more on an aircraft, ship, boat or other vessel

If your business has an asset and the extent to which you use it to make taxable supplies varies over the Capital Goods Scheme adjustment period (up to ten years depending on the asset), you'll have to adjust the amount of VAT you reclaimed. You can reclaim more if the proportion of your taxable supplies increases, but you'll have to repay some if it decreases.

Your taxable supplies are your sales that you make which are standard, reduced or zero-rated.

On this page:

The Capital Goods Scheme - the basics

If you acquire or create an asset that you use or intend to use only for making taxable supplies, you can reclaim all of the VAT you've paid.

If you use or intend to use the asset partly for making taxable supplies and partly for making exempt or non-business supplies, you can only reclaim a proportion of the VAT using your partial exemption and non-business calculations.

If the extent to which you use an expensive asset for making taxable supplies varies over the years, you may have to adjust the amount of VAT you reclaimed. And there are also rules for what to do if:

  • you register or deregister for VAT
  • you buy or sell a business
  • your business moves into or out of a VAT group
  • you sell an asset during its Capital Goods Scheme adjustment period

Since 1 January 2011 the Capital Goods Scheme includes non-business activities, and ships and aircraft. There have also been changes to simplify the Capital Goods Scheme.

Read more about changes to the Capital Goods Scheme in Information Sheet 06/11

Read more about the Capital Goods Scheme in Notice 706/2

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Assets included in the Capital Goods Scheme

The assets that are included in the scheme are:

  • land, buildings and civil engineering works
  • computers and computer equipment
  • aircraft, ships, boats or other vessels

Land and buildings

You'll have to use the Capital Goods Scheme if you spend £250,000 (excluding VAT) 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

Civil engineering work includes things like roads, bridges, golf courses, running tracks and the installation of pipes for connecting to mains services.

Computers

The scheme only applies to individual computers, or items of computer equipment, that cost £50,000 (excluding VAT) or more. It doesn't cover something like a network where the total cost of the server and all the computers and printers is £50,000 or more but each individual item is less than £50,000. Nor does it cover computerised equipment (for example, a computerised telephone exchange or computer-controlled blast furnace) or computer software.

Ships and Aircrafts

The scheme applies if you spend £50,000 or more (excluding VAT) on purchasing, constructing, refurbishing, fitting out, altering or extending an aircraft, ship, boat or other vessel.

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How to work out the value of assets

You'll need to know what to take into account to calculate the value of an asset so that you can:

  • decide whether it should be included in the scheme
  • work out any adjustment to the amount of VAT that you reclaimed

Section 4 of Notice 706/2 Capital Goods Scheme explains what you should take into account for valuing each type of asset covered by the scheme.

Download Notice 706/2 Capital Goods Scheme (PDF 130K)

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Assets not covered by the scheme

The scheme doesn't apply if:

  • you acquire assets just for resale
  • you spend money on assets that you acquired just for resale
  • you acquire assets, or spend money on assets that you only use for non-business purposes

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Making adjustments under the Capital Goods Scheme

The VAT you can reclaim on an asset covered by the scheme depends on the extent to which you use it to make taxable supplies during what's called the 'adjustment period'.

The adjustment period is made up of 'intervals' and the number of intervals making up an adjustment period depends on the type of asset.

Intervals

The first interval starts with first use of the asset. This is a common start date for all types of Capital Goods Scheme assets.

It ends on the day before the start of your next partial exemption tax year.

The remaining intervals are normally in line with your partial exemption tax year but might be less than a year if your business circumstances change - see the section below on changes in your business circumstances.

Adjustment periods

The number of intervals that make up an adjustment period varies depending on the type of asset.

Type of asset Number of intervals in an adjustment period
Computers, ships and aircrafts 5
All other assets 10

If the number of intervals is more than the number of complete years that you will own the asset by more than one, the adjustment period is the number of complete years plus one. However, there must be at least three intervals for it to be a Capital Goods Scheme asset.

Making adjustments

The VAT you initially recover on an asset is dealt with under the normal partial exemption and business/non-business rules. A business/non-business calculation allows you to find out how much VAT is for the purposes of your business. These rules mean that:

  • you can reclaim all the VAT on assets you use or intend to use only for making taxable supplies
  • you can't reclaim any of the VAT on assets you use or intend to use only for making exempt supplies or only for non-business purposes
  • you have to use a partial exemption method and/or business/non-business method to work out the percentage of the VAT you can reclaim on assets you use or intend to use for both taxable and exempt or non-business purposes.

You can read about how to work out how much VAT you can recover using your partial exemption and business/non-business calculations in our guide on VAT exemption and partial exemption (see the link below)

You don't need to make a Capital Goods Scheme adjustment for the first interval, only in later ones.

You only need to make an adjustment to the amount of VAT you reclaimed when you first acquired the asset if the extent to which you use it to make taxable supplies during the adjustment period changes. So at annual intervals for up to five or ten years, depending on the asset, you'll need to review the extent to which you use the asset for making taxable supplies. If the taxable use of the asset increases or decreases during the adjustment period, you'll have to adjust the amount of the VAT you reclaimed.

Once the final interval of the adjustment period has ended, you don't have to make any further adjustments for changes in use.

Notice 706/2 Capital Goods Scheme explains how to make adjustments under the Capital Goods Scheme.

Find out more about VAT exemption and partial exemption

Download Notice 706/2 Capital Goods Scheme (PDF 130K)

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Changes in your business circumstances

There are various changes to your business circumstances that might have an effect under the Capital Goods Scheme. These are when you:

  • register for VAT and you already own an asset that falls within the Capital Goods Scheme
  • leave or join a VAT group
  • cancel your VAT registration
  • buy or sell a business
  • sell an asset during its Capital Goods Scheme adjustment period

Notice 706/2 Capital Goods Scheme explain what action you'll need to take in any of these circumstances.

Download Notice 706/2 Capital Goods Scheme (PDF 130K)

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