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HMRC internal manual

VAT Input Tax

Is it input tax: apportionment of capital items

Evidence of choice


From 1 January 2011 purchases of:

  • immovable property (including construction services);
  • ships, boats or other vessels; and
  • aircraft

that are to be put to:

  • mixed business and private use (whether or not there is any non-business use); and
  • which are taken wholly into business assets

must be apportioned at the time of acquisition. Only the VAT that relates to business activities can be recovered.

Previously it had been possible to include these assets within the Lennartz mechanism (see VIT25280) but changes to UK law which came into effect on 1 January 2011 removed this option.

Depending on the value of the asset the business may be required to carry out adjustments under the Capital Goods Scheme (CGS). The adjustments will reflect changes in the business use of the asset over a set period of time:

  • 5 years for ships, boats or other vessels and aircraft;
  • 10 years for immovable property (including construction services).

Although the choice to permanently bring part of an asset into your business assets has similar initial consequences to the apportionment option (see VIT25240) it is an important consideration if a business is acquiring capital items.

The adjustment mechanism only applies when certain monetary or de minimis limits are exceeded. The limits are:

  • £250,000 for immoveable property (including construction services); and
  • £50,000 for ships, boats or other vessels and aircraft.

If the value of that part of the asset that the business has brought within the business is below that value, the business will not have to carry out these adjustments.

So this option may be attractive if a business acquires a building but has:

  • only minimal business use that it knows will not fluctuate to any great degree; and
  • it wants both the certainty and reduced compliance burden associated with not carrying out CGS adjustments for five to ten years.



A charity constructs a building at a cost of £2.4M inclusive of VAT. On completion the charity’s overall business use is 10%. After considering its options it elects to only bring this proportion within its business assets on a permanent basis.

Buildings are within the CGS so it is in principle to be included in the ten year adjustment mechanism. However, the de minimis limit for immoveable property is £250,000. The value of the asset that has been permanently brought into the business is £240,000. So, the business asset does not need to be included in the adjustment mechanism.

Permanent allocation of the business proportion of the asset has the same initial VAT treatment as apportionment (see VIT25240). In other words, VAT can be recovered to the extent that it is used for business purposes.

The difference in treatment will only have any effect when the time comes to make the first CGS adjustment. In this example, if the business does not opt for a permanent part allocation to business (by which it excludes the non-business proportion completely and permanently) the value of the business asset is £2.4M. CGS adjustments would need to be carried out each year for ten years.

{#IDA2VD0G}Evidence of choice

In order to avoid any doubt on whether CGS adjustments should apply a business must retain a record of the choice to permanently exclude part of the asset from its business. This record must be kept for six years or the life of the capital item if this is longer. The record may take the form of a letter to HMRC, minutes of a board meeting or similar.

Please note that this choice must be made at the time the asset is acquired.

If no such record exists the default position assumes that the asset is wholly business and as such CGS adjustments will apply.