VAT Capital Goods Scheme – land and property

These comments relate to input tax incurred after 1 January 2011 and may be subject to proposed future changes announced in 2025.

The VAT Capital Goods Scheme applies to capital expenditure on land and buildings with a value of £250,000 or more (exclusive of VAT) which was subject to VAT at the standard or reduced rate. Associated costs such as legal or estate agency fees are not included in the valuation for the purposes of the VAT Capital Goods Scheme.

The purchases in question are:

• an interest supplied to an owner in land, a building or part of a building or a civil engineering work – civil engineering work should be given its everyday meaning, which includes such items as roads, bridges, and installation of pipes for connection to mains services;
• expenditure incurred in the construction of a building, part of a building or a civil engineering work;
• alterations, extensions and annexes to buildings;
• alterations, extensions and annexes to civil engineering works; and
• capital expenditure on services and goods in the course of refurbishing or fitting out a building.

What qualifies as ‘capital expenditure’?

This is normally expenditure capitalised for accounting purposes. HMRC will not normally challenge a capitalisation policy for the purposes of the VAT Capital Goods Scheme, except in cases of avoidance or abuse.

How to establish the value of a constructed building or civil engineering work

You should include the total VAT exclusive cost of any of the following supplies made to you:
• the interest in the land, if the supply to you was taxable (other than zero-rated)
• taxable (other than zero-rated) goods and services supplied for, or in connection with, the construction of the building or civil engineering work

You should include all the costs involved in making the building ready, such as:
• professional and managerial services including architects, surveyors and site management
• demolition and site clearance
• building and civil engineering contractors’ services
• materials used in the construction
• security
• equipment hire
• haulage
• landscaping
• fitting out, including the value of any fixtures.

How to establish the value of an alteration, extension or annex where the value of the goods and services received is £250,000 or more

You should include the total value of all taxable (other than zero-rated) goods or services supplied to you for, or in connection with, the alteration, extension or annex.

You should include all the costs involved in making the building or civil engineering work ready.

What you should include in the value if a capital item is refurbished or fitted out

You should only include the value of capital expenditure on the taxable (other than zero-rated) supply of services and or civil engineering work supplied to you for or in connection with the refurbishment or fit out.

You should include all the costs involved in making the refurbished or fitted out building ready.

The adjustment period

An adjustment period in relation to the VAT Capital Goods Scheme is the time over which you review the extent to which a capital item is used in making taxable supplies. In relation to land and property this extends to 10 intervals.

Under the VAT Capital Goods Scheme you can initially reclaim VAT that is used or to be used to make taxable supplies. This involves the following steps:
Step 1 requires you, if appropriate, to select your own business non business (BNB) calculation.
Step 2 is to determine recoverable VAT in accordance with a VAT partial exemption method. If you’re partly exempt, you must use the turnover-based standard method which is set out in legislation or a special method which must be approved by HMRC.

If the asset is used:
• only to make taxable supplies, all of the input tax is deductible
• only to make exempt supplies, none of the input tax is deductible
• to make taxable and exempt supplies, you’ll need to carry out a partial exemption calculation – partial exemption calculation is normally carried out in accordance with a partial exemption method and, unlike the BNB calculation, is normally subject to an annual adjustment.

VAT Capital Goods Scheme adjustments

The owner of a capital item is required to review, after the first interval, the extent to which VAT is deductible on the asset in each subsequent interval. To do this you must imagine that you’ve incurred all of the VAT on the asset again and repeat the steps above taking account of any changes in use.

In each of the subsequent intervals the extent of taxable use determined under the longer period partial exemption calculation (or business or non-business calculation if applicable) is compared with the ‘baseline’ recovery. The difference is called the ‘adjustment percentage’.

The actual input tax adjustment (if any) required in a subsequent interval is calculated by dividing the total input tax on the capital item by the total number of intervals in the adjustment period (usually 10). You then multiply by the adjustment percentage. Thus the calculation for the VAT Capital Goods Scheme is:

Total VAT on the item divided by
Number of intervals in the adjustment period x the adjustment percentage.

Contact

To speak to a VAT specialist with regard to the VAT Capital Goods Scheme call Solve VAT on 0161 883 2120.

HMRC

HMRC’s guidance on the VAT Capital Goods Scheme is available in Notice 706/2