Capital goods scheme (CGS)
The CGS is designed to ensure fair attribution of VAT on high-value capital assets over a period of time. This scheme is particularly relevant for agricultural businesses making significant investments in property.
Previously, the CGS applied to properties or improvements, extensions, or alterations to existing properties with a total cost of £250,000 or more (excluding VAT). The government has recently announced an increase in the expenditure threshold for land and buildings to £600,000. The effective date for this change has yet to be specified.
When a capital item is purchased, the initial VAT is reclaimed based on its intended use. The CGS then adjusts the VAT over a ten-year period to reflect the actual use of the asset during this time. If there is a change in the use of the building, an annual adjustment may be required to restrict the initial VAT recovered. If the property is sold, the final adjustment occurs in the year of sale, adjusting for the input tax for all remaining years. If the property sale is exempt from VAT, a clawback of the remaining VAT will occur.
VAT on farmhouses
Farmhouses are integral to farming businesses, providing both domestic accommodation and a base for farm operations. The VAT recovery on works to farmhouses depends on the proportion of business use versus private use.
HMRC generally allows recovery of 70% of the VAT incurred on general repair and maintenance works. For extension and alteration works, HMRC typically allows recovery of up to 40% of the VAT incurred.
Partial exemption
Farmers often deal with both taxable and exempt supplies, such as selling agricultural products (taxable) and renting residential cottages (exempt). The partial exemption rules determine the correct amount of VAT to reclaim on expenses. The rules allocate costs between taxable and exempt supplies and can restrict the overall input tax.
Consider a farmer who incurs £35,000 of input tax. This amount is broken down as follows:
- £15,000 directly relates to taxable supplies.
- £10,000 directly relates to exempt supplies.
- £5,000 is unattributed to either supply (residual input tax).
Based on the standard method of calculation, if 70% of their supplies are taxable and 30% are exempt, they can recover £15,000 relating to taxable supplies, and 70% of the residual VAT, which amounts to £3,500.
For businesses with minimal exempt supplies, the de minimis rule simplifies VAT recovery by allowing full recovery of input tax, providing the total relating to exempt supplies is under £7,500 per annum.
If a similar farmer has a similar split of turnover but incurs £10,000 in input tax as follows:
- £7,000 directly relates to taxable supplies.
- £2,000 directly relates to exempt supplies.
- £1,000 is unattributed to either supply (residual input tax).
As the total VAT relating to exempt supplies is only £2,300, £2,000 (direct), plus £300 (residual), this amount is under the de minimis limit and can be recovered in full.
VAT is a complicated area, for more detailed guidance on navigating the CGS, VAT on farmhouses, or partial exemption, please get in touch.
