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HMRC internal manual

VAT Partial Exemption Guidance

Other partial Exemption issues: The Capital Goods Scheme (CGS): legal basis

EC legislation

Article 187 of the principal VAT Directive (2006/112/EC) (formerly Article 20(2) of the 6th Directive) requires member States to make yearly adjustments to the originally recoverable input tax on capital goods in subsequent years if the taxable use has changed. This process is to cover five years but may be extended to up to twenty years for immovable property.

Article 189 (formerly Article 20(4)) allows considerable flexibility to member States in implementing this. In particular it allows member States to define capital goods, to set the amount of input tax to be adjusted and to have administrative simplifications.

UK legislation

This is enacted in the UK as the Capital Items Scheme in Part XV of the VAT Regulations, SI 1995/2518, regulations 112 to 116. These set out what items are included, how they are valued, when they come within the scheme, what intervals will apply to them and how taxable use in those intervals will be established.

Scope, valuation and definitions

These issues are well covered in VAT Notice 706/2 Capital Goods Scheme so only additional points are covered here.

As only the terms “capital item” and “the owner” are defined for the purposes of regulation 113, all other terms take their normal meaning. This includes the word computer.

The value for computers and computer equipment includes the costs of delivery and installation unless these are invoiced separately. If a computer is imported, the value is the value for VAT at importation. This includes any import duty payable.

Supplies received at the reduced rate of VAT can form part of the value of a capital item and the VAT incurred can be part of the baseline input tax to be adjusted. They count full value in determining whether a capital item is established.

In refurbishment items all of the expenditure will normally be capital in nature. So the only issue is generally what elements are affixed.