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HMRC internal manual

VAT Partial Exemption Guidance

Other partial Exemption issues: The Capital Goods Scheme (CGS): what are capital goods?

In accountancy, expenditure is generally classified as either revenue or capital. These are treated differently to each other both for compiling statutory accounts and calculating tax due. Revenue expenditure is set against sales in full in calculating profit whereas capital expenditure is written off against profit over several years with any remaining un-written off value treated as an asset of the business.

The word “capital” is not defined in law so its meaning comes substantially out of case law. A significant case is that of Verbond van Nederlandse Ondernemingen v Inspecteur der Invoerrechten en Accijnzen [1997] ECR 113 (which refers to when the second VAT Directive was still extant). This says:

“The ordinary meaning of the expression and its function in the context of the provisions of the Second Directive indicate that it covers goods used for the purposes of some business activity and distinguishable by their durable nature and their value and such that the acquisition costs are not normally treated as current expenditure but written off over several years.” 

This definition still leaves a great deal down to individual circumstance and to common sense. Commercial reality is also always relevant.

It is normal to accept how costs are treated in businesses’ statutory accounts unless they have adopted unusual or counter-intuitive accounting policies, they are operating in a non-commercial environment or there are clear avoidance motives.