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HMRC internal manual

VAT Partial Exemption Guidance

Guidance for specific trade sectors: land and property: Capital Goods Scheme items

Capital Goods Scheme adjustments are necessary when there is a change in use of land or a building that is a capital item. Where a method does not treat individual buildings as partial exemption sectors in their own right, what is probably needed is a sector to deal with capital items.

There are normally two things that need to be thought about when including capital items within the partial exemption method - how to deal with the initial deduction (including the ‘longer period’ adjustment) of input tax and how to deal with ‘subsequent interval’ adjustments. The method should specify how the input tax is to be apportioned in the event of initial mixed-use (i.e. taxable/exempt) or any subsequent changes of use (i.e. from exempt to taxable).

Finally, the method also needs to address disposals during the adjustment period and ought also to address TOGC/movement in/out of VAT groups (as the business could receive capital items this way).