Transitional properties - freehold or freehold equivalent interests held prior to 1 July 2008
Capital Goods Scheme (CGS)
How does the CGS apply?
In most cases, the Capital Goods Scheme (CGS) only applies in relation to the supply of such properties. The normal annual adjustments under the CGS and the adjustments on exercising and terminating the landlord's option to tax a letting of the property do not apply. However, where the holder makes an exempt letting of such a property, a deductibility adjustment independent of CGS is required.
If, 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. For more detailed information on the big swing for transitional properties, see further guidance.
Where a transitional property is supplied within the Value-Added Tax (VAT) life of the property, the CGS adjustments relating to supplies, apply to that transaction.
Exempt sale of a freehold or freehold equivalent interest transitional property
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.
Taxable sale of a freehold or freehold equivalent interest transitional property
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.
CGS rules for a freehold or freehold equivalent interest acquired on or after 1 July 2007 and prior to 1 July 2008
In such cases, unless the purchaser has adjusted the input credit by reference to taxable use, the ordinary CGS rules for the adjustment of the deductible amount at the end of the initial interval will apply to the VAT incurred in relation to the property.
What is the CGS adjustment period?
The CGS adjustment period in relation to a freehold or freehold equivalent interest in a completed property held at 1 July 2008 is a period of 20 years from the acquisition of the interest.
Where such property has been developed since its completion or acquisition, this development creates a capital good for the purposes of the CGS and is referred to as a refurbishment. The CGS adjustment period for this refurbishment is ten intervals.
The legislation currently states that if the property has been developed since the acquisition or creation of that interest, the adjustment period is 20 years from the date of the most recent development of those goods. Revenue accepts that this clause will not apply to such property where the person who owns that freehold interest carries out a development and that development is a refurbishment for VAT purposes.
- Example 1
Mr K acquires an undeveloped field (no VAT charged) in 1995. As no VAT was charged on the acquisition, this is not a capital good. A property is developed to completion in 2005 and VAT is incurred on the development.
This development created a capital good and the adjustment period for this capital good is 20 years from the completion of the development.
- Example 2
Ms S develops a building to completion in 2002. This creates a capital good with an adjustment period of 20 years. In 2009, Ms S carries out a development of the property. This creates a separate capital good (being the refurbishment) with an adjustment period of ten intervals.
Even if this refurbishment was carried out prior to 1 July 2008, the adjustment period would still be ten intervals from the date of completion of the development.