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HMRC internal manual

Capital Allowances Manual

PMA: Miscellaneous: Additional VAT

CAA01/S234 - S240

The VAT payable on an asset is usually determined by the first use of that asset. This is particularly an issue for businesses that make both taxable and exempt supplies for VAT purposes. The VAT Capital Goods Scheme (which applies to large capital items of capital expenditure) adjusts the VAT due if the use of an asset changes during the period of ownership. If the mix of use changes, for VAT purposes, from taxable to exempt a further amount (called an additional VAT liability) is payable by the taxpayer. This reflects the fact that too much VAT was originally claimed by the taxpayer (based on the initial use). Conversely, if the mix of use changes, for VAT purposes, from exempt to taxable a higher proportion of the input tax originally incurred by the taxpayer (called an additional VAT rebate) is payable by HMRC to the taxpayer. The VAT Capital Goods scheme applies to computers and computer equipment worth £50,000 or more (and applies over the first 5 years of the asset’s life) and to land and buildings worth £250,000 or more (over a 10-year period).

Additional VAT paid by the owner of an asset is qualifying expenditure provided that:

  • the original expenditure was qualifying expenditure, and
  • the original asset is provided for the purposes of the qualifying activity when the additional VAT liability is incurred.


The second condition means that an additional VAT liability can only be added to qualifying expenditure if there has not been a disposal event within CAA01/S61 (2) CA23240 before it is incurred.

If an additional VAT liability is incurred on an asset that qualified for FYA, the additional VAT liability qualifies for FYA provided that:

  • there has not been a disposal event within CAA01/S61 (2) before it is incurred,
  • the asset is not leased overseas other than by protected leasing CA24010, and
  • the FYA has not been withdrawn under CAA01/S43 CA23120.


The rate of FYA is the same as the rate that applied to the original expenditure.

If a person who has incurred qualifying expenditure receives an additional VAT rebate while owning the asset at some time in the chargeable period in which the rebate is made, the receipt of the VAT rebate is a disposal event. This means that the rebate is brought to account as a disposal value in addition to any other disposal value to be brought to account. You should take any additional VAT rebates received (both by the taxpayer and, where the asset was acquired in a connected persons transaction, by the connected persons) into account when you apply the expenditure incurred limit to disposal value CA23250.

Example Cassie buys a computer for £10,000 from Jack.

The computer cost Jack £11,000.

Jack received an additional VAT rebate of £100 in respect of his use before he sold the computer to Cassie.

If Cassie and Jack are not connected persons, when Cassie sells the computer, Cassie’s disposal value is limited to her qualifying expenditure of £10,000.

However, if Cassie and Jack are connected persons, the limit on her disposal value is £10,900, Jack’s expenditure less the additional VAT rebate that he received.

If someone has made a short life asset election for an asset and has claimed a balancing allowance CA23640 incurs a further additional VAT liability, they can claim a further balancing allowance equal to the further additional VAT liability.