The Capital Goods Scheme (CGS) remains a source of confusion ten years after the "New" VAT on property rules were implemented. The CGS was created to ensure that the VAT recovered on the purchase or development of a property (a Capital Good) reflects the use that the property is put to over its 'VAT-life.' The CGS scheme requires that each capital good have a VAT-life or adjustment period of twenty intervals in most cases, but this can be reduced to ten intervals in some cases. There are no further obligations under the scheme once the twenty-interval period has passed. The VAT paid on the purchase or development of a property is deductible in accordance with the standard deductibility rules. A person engaged in fully vatable activities has the right to deduct the entire VAT charged on the acquisition of a property to be used in connection with these activities. At the end of each interval, the owner of the Capital Good must examine the use to which the property was put during that interval period (usually the accounting year) and compare it to the VATable percentage usage to which the property was put during the initial interval (the first year of the Capital Good) and make any necessary VAT adjustments. Adjustments under the Capital Good Scheme can be a complicated area of VAT law, with some adjustments known as "Big Swings" potentially clawing back all of the VAT recovered on the Capital Good. For example, under the Capital Goods Scheme, if a property is used for VATable purposes 65% of the time over a 20-year period, the owner should have deducted and retained exactly 65% of the VAT incurred on the acquisition/development costs at the end of that period through a series of adjustments. Record of Capital Goods Scheme Under the Capital Goods Scheme rules there is an obligation to maintain a record, known as a Capital Goods Scheme Record (CGR) for each property containing sufficient information to determine any adjustment required under Capital Goods Scheme. Essentially, these records must keep track of all VAT incurred on the acquisition or development of a property for up to 20 years, as well as the VAT periods in which these costs were recovered. This obligation applies whether or not the VAT is recoverable. In some cases, a single property may have multiple records. This occurs when a property has undergone even minor alterations or development. These records are used to track VAT recovered on a property and are linked to the above-mentioned Capital Goods Scheme adjustments. In some cases, vendors are required to hand over Capital Goods Scheme Records to the purchaser of their property, and it is the purchaser's responsibility to keep the Capital Goods Scheme Record up to date. One example is the Transfer of Business Relief rules, which require the vendor to hand over a CGR detailing the VAT attached to the property as well as the VAT life remaining, with the purchaser stepping into the vendor's shoes for the remainder of the Capital Goods VAT life. When purchasing a Capital Goods Scheme Record, purchasers should exercise extreme caution. As previously stated, the VAT on a Capital Goods Scheme record is based on historical VAT recovered, and in some cases, the VAT in play under the capital goods scheme can be greater than the purchase price of a property. Seek advice The above is a high-level overview of the Capital Goods Scheme; however, there are frequently exceptions to the general rules, and there are situations where the VAT treatment is not clear at first glance. We can start moving toward a conclusion to this conversation now that you have amassed a sufficient amount of knowledge concerning the capital Goods Scheme for VAT that was presented in this blog. There were no activities that were not related to the business at the time that the asset was being purchased, so this does not affect your eligibility for the scheme. In this regard, you need to be aware that in order to be eligible for the scheme, you are required to keep accurate records of the assets that you have purchased.
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