ACCA ATX ^UK Syllabus A6. Value Added Tax - Capital goods scheme - Notes ^{3 / 4}

This is a scheme that applies to partially exempt businesses (businesses with taxable and exempt turnover) that spend large amounts of money on land and buildings or computers and computer equipment.

Where the scheme applies, the first deduction of input tax is made in the normal way for a partially exempt business (% of taxable supplies * input vat)  and then the input VAT that was deducted initially is reviewed over a set adjustment period. 

The review is based on the proportion of taxable to exempt turnover over a set number of years. 

Therefore, this scheme is to stop businesses manipulating their proportion of taxable and exempt supplies in the period of purchase in order to reclaim more input VAT. 

For example, if a business purchased a piece of land that had input VAT of £100,000 and in the year of purchase they had 80% taxable supplies and 20% exempt supplies, then they can recover 80% * £100,000 = £80,000 input VAT. 

However, in the following years if their taxable supplies were 50% and exempt supplies were 50% - then it looks like they have recovered an additional amount of input VAT by increasing their taxable supplies in the year of purchase.

Therefore, in the above example:

£100,000/10 years * (50%-80%) = £3,000 will need to be repaid each year for 10 years

Adjustments are made over the next 10/5 years if the proportion of exempt supplies changes.

The annual adjustment calculation is:

Total input VAT/10 or 5 years x (% now - % in the year of acquisition)

Illustration

A partially exempt company purchases a computer for £100,000 plus VAT on 1 January 2023. 

In the first year to 31 March 2023, the company has 60% taxable supplies which fall to 50% in the second year and increase to 80% in the third, which will then remain the same for future years.

The company sold the computer for £6,000 plus VAT on 10 August 2025.

Required:

• Calculate the amount of input VAT recoverable in the year of purchase and the annual adjustment required under the capital goods scheme for years 2 and 3.

• Calculate the adjustment needed as a result of the sale of the computer on 10 August 2025.

Solution

1. The input tax recoverable in the year ended 31 March 2023: 
   Cost of computer 100,000 
   Input tax = 20,000 
   Recoverable input tax (20,000 × 60%) = 12,000

2. Annual adjustment y/e 31 March 2024: 20,000/5 × (50 – 60) 
   Pay VAT to HMRC 400

3. Annual adjustment year ended 31 March 2025: 
   20,000/5 × (80 – 60) 
   Reclaim VAT from HMRC 800

4. Annual adjustment year ended 31 March 2026
   Year of sale 
   20,000/5 × (80 – 60) 
   Reclaim VAT from HMRC 800

5. On sale assume 100% taxable for remaining years: 
   20,000/5 (× (100 – 60) × 1 year ) = 1,600 
   Limited to a maximum of  1,200 
   VAT charged on sale (6,000 × 20%) =1,200