Ten years into the “New” VAT on property rules and the Capital Goods Scheme (CGS) is still an area of complexity. The CGS was introduced to ensure that the VAT recovered on the acquisition or development of a property (a Capital Good) reflects the use that the property is put to over its 'VAT-life'

The CGS scheme provides that in most cases each capital good will have a VAT-life or adjustment period of twenty intervals however, this can in some cases be 10 intervals. Once the period of twenty intervals has elapsed, there are no further obligations under the scheme.

The VAT incurred on the acquisition or development of a property is deductible in accordance with the normal rules relating to deductibility. A person who is engaged in fully vatable activities is entitled to deduct all of the VAT charged on the acquisition of a property to be used in respect of these activities. At the end of each interval the owner of the Capital Good must examine the use to which the property is put during that interval period (usually the accounting year) and compare the VATable percentage usage to which the property was put during the initial interval (first year of the Capital Good) and make any VAT adjustments as required. Adjustments under the Capital Good Scheme can be a complex area of VAT law with some adjustments referred to as a ‘Big Swing’ potentially clawing back all the VAT recovered on the Capital Good.

For example under the Capital Goods Scheme, if a property is used for, say 65% of the time in the 20 year period for VATable purposes, at the end of that 20 year period the owner should have, through a series of adjustments, deducted and retained exactly 65% of the VAT incurred on the acquisition/development costs.

Capital Goods Scheme Record

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 record all VAT incurred on acquisition or development of a property for up to 20 years as well as details of what VAT periods these costs were recovered in. This obligation applies regardless of whether that VAT is recoverable or not. In some cases there can be more than one record for a single property. This arises where there has been even minor alterations or development to a property. These records are used to track VAT recovered on a property and are linked to the adjustments referred to above under the Capital Goods Scheme.

In certain circumstances vendors are required to hand Capital Goods Scheme Records over to the purchaser of their property and it becomes the purchaser’s responsibility to maintain the Capital Goods Scheme Record going forward. One example of this is under Transfer of Business Relief rules where the vendor is required to handover a CGR, showing details of the VAT attaching to the property along with the VAT life remaining whereby the purchaser will step into the shoes of the vendor for the remainder of the Capital Goods VAT life.

Particular care should be taken when purchasers are taking over a Capital Goods Scheme Record. As outlined above, 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 more than the price being paid for a property.

Obtain advice

The above is a high level overview of the Capital Goods Scheme, however, there are often exceptions to the general rules and quite often there can be situations where at first glance the VAT treatment is not clear.
To discuss the above in more detail please contact Christopher Connolly or Donal Kennedy.