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HMRC internal manual

Capital Allowances Manual

From
HM Revenue & Customs
Updated
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IBA: additional VAT: background and definitions

Budget 2007 announced a business tax reform package including the gradual withdrawal of IBAs and ABAs over four years. Legislation was introduced in FA08 to give effect to those changes. The phased withdrawal of IBA writing down allowances had effect for chargeable periods ending on or after 1 April 2008 for businesses within the charge to CT and 6 April 2008 for businesses within the charge to IT. There are no IBA writing down allowances for the financial year beginning on 1 April 2011 and subsequent years.

The VAT payable on the purchase of a capital asset is broadly determined by the first use of that asset. Generally all the VAT incurred on the purchase of the asset can be claimed back by a VAT registered business on its next VAT return if it is to be used for business purposes to make taxable supplies.

The VAT Capital Goods Scheme adjusts this recovery of VAT if broadly the use of certain capital assets changes later on. If the proportion of use changes later on from taxable (for VAT) to exempt (for VAT) additional VAT is payable by the purchaser. If the proportion of use changes from exempt (for VAT) to taxable (for VAT) additional VAT is repaid by Customs.

The VAT Capital Goods scheme applies to land and buildings worth £250,000 or more. It can result in additional VAT consequences for up to 10 years.

An additional VAT liability is the further VAT payable to Customs if the proportion of use of an asset covered by the VAT Capital Goods scheme changes from taxable to exempt.

An additional VAT rebate is VAT repayable by Customs when the proportion of use of an asset covered by the VAT Capital Goods scheme changes from exempt to taxable.

The relevant VAT interval is the period used to make the computation which gives rise to the additional VAT payable or the additional VAT rebate.

An additional VAT liability is incurred and an additional VAT rebate arises on the last day of the relevant VAT interval.