About the Vat Capital Goods Scheme

The UK Value Added Tax (VAT) is Britain’s consumption tax. Special schemes exist for a number of situations, including the sale of capital goods and the sale of second-hand goods. Registered retailers can use the Capital Goods Scheme on transactions involving more than £250,000 in real estate or engineering projects, or £50,000 on a computer.

As a general rule, the VAT is a charge of 17.5% on sales, due to rise to 20% in 2011 according to recent announcements by the UK government. This headline rate does not apply in all circumstances: there are numerous exceptions, exemptions, and margin schemes for retailers in certain categories. Overall, VAT is one of the government’s most important sources of revenue, following income taxes and national insurance.

According to Revenue & Customs, the Capital Goods Scheme applies to sales of land or engineering works worth more than £250,000, as well as to sales of a single computer or a single piece of computer equipment worth more than £50,000. Eligible real estate includes land, buildings, and alterations or extensions of existing buildings, with the latter category applying only if the extension adds at least 10% to the total floor space of the building in question. Engineering works refers to road and bridge construction, pipes, and golf courses. A full list of eligible transactions is available in Notice 706/2. Note that when the Capital Goods Scheme is used to cover computer purchases, the £50,000 price limit must apply to each single computer or computer equipment component, not to the overall price of a sale covering multiple computers and totalling over £50,000.

If a business purchases an asset from these categories which will be used solely for making new taxable goods, it can apply to reclaim all of the tax paid on that purchase. If the same asset is going to be used partially for producing new goods and partially for other (i.e. personal) reasons, then a proportion of the tax paid can be reclaimed. Note that in no circumstance can the Capital Goods Scheme be used if the goods or real estate were acquired for the purpose of reselling them or if the goods in question are going to be wholly used for personal purposes.

The Capital Goods Scheme establishes a system under which taxes paid to acquire the computer, land, or buildings can be reclaimed in multiple intervals of an overall “adjustment period.” If VAT registration is cancelled, the business is sold, or an asset is sold during the adjustment period, then adjustments may need to be made to coverage under the Capital Goods Scheme. Notice 706/2 explains these procedures.