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HMRC internal manual

VAT Partial Exemption Guidance

HM Revenue & Customs
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Other partial Exemption issues: The Capital Goods Scheme (CGS): calculating taxable use

The interaction of calculating taxable use with de minimis

The normal method of establishing the level of taxable use of an item in a subsequent interval is by regulation 116(1). This sets it by the result coming out of the business’s normal PE calculations for the interval under Part XIV of the regulations.

In any subsequent interval where the longer period calculation finds the business to be de minimis any exempt business use in that period is generally ignored for CGS purposes. If, however, the Standard Method Override (SMO) would have been triggered had all the input tax on the item been incurred in the year in question and treated as de minimis, this is not the case.

The influence of sectorisation on establishing taxable use

Regulation 116(1) effectively puts the full input tax that was incurred on the CGS item initially through whatever PE method the business is now on. If that method is sectorised then it is necessary to look at how the input tax would be allocated between sectors if it were incurred in the subsequent interval in question.

If the input tax would be allocated to a single sector then that sector’s recovery rate will set the taxable use in the interval. If the input tax would be allocated to two or more sectors then we need a weighted average of those sectors’ recovery rates based on the amount of the input tax that would be allocated to each of them.

Agreeing how taxable use will be established

If HMRC and any business agree that reg. 116(1) will not provide a fair reflection of how a CGS item will be used in making taxable supplies in subsequent intervals then we can agree an alternative method under reg. 116(2). Any calculation that achieves a fair result is acceptable.

All agreements should be set out clearly in writing. Much of the guidance in PE30000 - Partial Exemption Methods - may be helpful in drafting such letters. If further advice is needed then the resources set out in PE10500 - Roles and responsibilities - should be called in.

CGS method approvals are completely separate from any PE special methods approvals that may or may not exist so any agreement letters should be separate from PE special method documents.

Items that have been TOGC’d or in a change of grouping

When items are transferred as part of a TOGC or are included in a grouping or de-grouping for the first time then all subsequent intervals for that item will end on the day before the anniversary of that event. As the intervals for the item will not align with the normal tax year it is not possible to use the recovery rate coming out of Part XIV of the regulations to set the level of taxable use. Regulation 116(A2) thus requires the business to agree an alternative method of establishing taxable use.

If we are happy that normal PE calculations fairly reflect how any item is used in subsequent intervals then an average or weighted average of the recovery rates of the two tax years is likely to give a fair result. If information to fully calculate this is not available in time for the period when the adjustment would normally be posted then we have the power to allow another later return to be used. This would normally be the first return on which the information should be available.

Directing how taxable use will be established

If the normal method of establishing taxable use does not fairly reflect use in making taxable supplies then we can agree or direct another method under regulation 116(2).

No directions should be made without first consulting PE Policy Team. Although regulation 116(2) does not restrict directions to future intervals we would still not make retrospective directions unless there is a clear avoidance motive.