Commentary on Sections Glossary Overview Background
1902.The capital goods scheme is relevant to businesses that, under VAT legislation, make both exempt and non-exempt supplies. These traders are known as “partially exempt traders”. When a VAT-registered business incurs VAT on its purchases (input tax), it can usually offset these amounts against the tax it owes to HM Customs & Excise on its sales (output tax). However, partially-exempt businesses are not able to do so in respect of purchases attributable to exempt sales (or “supplies”).
1903.Generally with VAT, the rules for capital expenditure do not differ from the rules for revenue items. However, the capital goods scheme is an exception. For certain types of capital expenditure, it is necessary for partially-exempt businesses to make an annual adjustment over a period of five or ten years so that the reclaimable input tax reflects the proportion of use attributable to the making of non-exempt supplies during the period.
1904.The types of expenditure covered by the scheme can be broadly divided into three categories:
	computers or computer equipment worth £50,000 or more;
	land and buildings worth £250,000 or more; and
	building works worth £250,000 or more.
Adjustments are made over a five-year period in respect of the first category; and they are made over a ten-year period in respect of the other categories.
1905.It is a general principle of income tax and corporation tax that any non-recoverable VAT should be relieved as a cost for direct tax purposes. When the capital goods scheme was introduced in 1990, it became necessary to ensure that the capital allowances provisions could cater for VAT adjustments made under the Scheme so far as they related to expenditure covered by CAA 1990. The legislation to do this was introduced in FA 1991. And to simplify matters, the legislation was only introduced to cover cases in which the original expenditure was covered by the rules for plant and machinery allowances, industrial buildings allowances or R&D allowances.
1906.Broadly under these rules, if a taxpayer incurs an additional VAT liability (because the proportion of exempt use has risen) then the additional VAT liability is treated as additional capital expenditure incurred. And if a taxpayer receives an additional VAT rebate (because the proportion of exempt use has fallen) then the taxpayer is treated as receiving disposal proceeds equal to the amount received. However, the rules differ between the various Parts. This reflects the different schemes for allowances and charges under these Parts.