VAT-saving opportunity with changes to the CGS?

How does the scheme work?

If your business currently spends at least £250,000 (excluding VAT) on the purchase of a building, or on building improvement works and extensions to your building, the expenditure will come within the scope of the capital goods scheme (CGS) . This means that the input tax you initially claim on your expenditure must be reviewed and adjusted over the next ten years, i.e. to reflect any change in the building use between taxable and exempt activities.

1. If your exempt use of the building increases during the ten-year adjustment period, you will repay input tax to HMRC with the annual adjustments.
2. If your taxable use of the building increases during the ten-year adjustment period, you will claim extra input tax from HMRC with the annual adjustments.

The annual adjustments are completed at the end of your VAT year, which is 31 March, 30 April or 31 May, depending on your periods. If you submit monthly returns, it is 31 March. The calculations are based on your usual partial exemption method. You will adjust your input tax on the return that includes the following 30 September, not the return at the end of the tax year.

Changes on the way

The £250,000 limit has been in place since the 1980s, so an increase is long overdue and the government intends to increase it to £600,000; it has not yet specified the date. If your business is planning to purchase a commercial property that is subject to VAT, either because it is a freehold property which is less than three years old or because the seller has opted to tax the building, it is worth considering delaying the purchase in some cases but only if it will cost between £250,000 and £600,000 excluding VAT.

A delay might also be worthwhile if you intend to improve or extend a building you already own where the expenditure is between these amounts.

Example. Barry trades as a nightclub and owns the freehold of his premises. He intends to construct an extension within the next three years, which will cost £500,000 plus VAT. If the nightclub does not trade well, he plans to convert the business into a casino. As the casino income will be mainly exempt from VAT, whereas the sales from a nightclub are taxable, the CGS annual adjustments will produce input tax repayments after the change of use. However, if Barry delays building the extension until the increased threshold of £600,000 takes effect, there will be no CGS issues because the project cost will be less than the new limit.

The opposite outcome will also apply. If your business will increase its taxable sales in the next ten years, the CGS produces a winning outcome, i.e. extra input tax to claim with the annual adjustments.

Time savings

The main purpose of the increased threshold is to save time and administration costs for business owners. This is because there will be a reduction in the number of capital assets that come within the scheme limits. As a separate measure, the government also intends to remove computer purchases costing at least £50,000 excluding VAT from the CGS. However, as this only applies to computer hardware costs, not software, it is probably not relevant to your business anyway.