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Capital Goods Scheme (CGS) — main provisions

  1. Overview
  2. What is the Capital Goods Scheme (CGS)?
  3. When does the CGS apply?
  4. VAT-life of a capital good and CGS intervals
  5. Obligation at the end of a CGS interval
  6. CGS second and subsequent intervals
  7. CGS adjustment where property use is linked to overheads
  8. Big swing in taxable use

When does the CGS apply?

The Capital Goods Scheme (CGS) applies, when you:

  • have been charged Value-Added Tax (VAT) on the acquisition or development of a property
    and
  • are engaged in business.

If you acquire or develop a property in these circumstances you are known as a capital goods owner and will be referred to, for the purpose of this section, as the owner.

CGS also applies to transitional properties and the owner of such property is also known as the capital goods owner.

However, in the application of CGS to immovable goods and interests in immovable goods that are transitional properties, certain elements of the CGS are disregarded in respect of the person who owns those immovable goods or holds an interest in those immovable goods on 1 July 2008. These elements are the interval-based adjustments, the big swing rule (but see below*), and the opportunity for a landlord to claim a credit for residual VAT when he exercises an option to tax a letting of a property that had previously been exempt.

If a development is completed on or after 1 July 2008, and it is a refurbishment for VAT purposes then these elements of the CGS mentioned above are not disregarded in respect of that refurbishment.

*Where on or after 23 February 2010, a transitional property is used for the first time or there is a change of use in the property, the big-swing test will apply to such properties. The owner of such a property will be obliged to make a big-swing adjustment if the first use or the changed use of that property results in a swing of more than 50 percentage points.

Where there is a transfer of ownership of a transitional property within its VAT-life, the CGS adjustments relating to supplies, apply to that transaction. If such a property is sold and the sale is exempt from VAT, the claw-back provisions of the CGS in relation to exempt supplies apply. If such a property is sold and the sale is taxable, the additional input credit provisions of the CGS in relation to taxable supplies apply.

When does the CGS not apply?

The scheme does not apply if:

  • you are not engaged in an economic (business) activity
  • you are a taxable person who acquires or develops a property in a non-business capacity
  • no VAT was charged on the supply of the property to you.

CGS and development by the tenant

Where a tenant has a leasehold interest in a completed property and carries out development work on that property then the tenant creates a capital good. The tenant is regarded as the owner of this capital good. This development is a refurbishment and the adjustment period is ten years.

All of the obligations in relation to the initial, second and subsequent intervals arise for the tenant in relation to the development work carried out. Any change in use must be adjusted for over the adjustment period, which is ten intervals.

There are obligations on the tenant if the lease is assigned or surrendered during the adjustment period for the refurbishment.

The normal annual adjustment (based on 1/20) provisions in the CGS, and the CGS provisions relating to the landlord’s option to tax, do not apply to refurbishments which were completed prior to 1 July 2008.

Next: VAT-life of a capital good and CGS intervals

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