The Capital Goods Scheme is designed to recognise that certain items (“capital items”) have a long life and that the extent to which those items are used to make taxable supplies may change during their life. From 1 January 2011, the definition of Capital items includes:

• a computer or an item of computer equipment acquired for not less than £50,000
• Capital expenditure of not less than £250,000 on acquisition of land or acquisition/ construction of buildings
• capital expenditure of not less than £250,000 on fitting out, extending, altering or refurbishing a building, or
• capital expenditure of not less than £50,000 on the acquisition, construction, refurbishment, fitting out, alteration, extension of an aircraft,a ship, boat or other vessel

These values are net of VAT.

If a charity acquires a capital item as above, the initial VAT recovery will be based on the rules for business vs non-business considerations and for VAT exemptions. Assuming that VAT is recovered, the charity will then need to monitor the extent to which the item is used to make taxable supplies in subsequent periods (which would typically be done by reference to the partial exemption method adopted). If the extent to which the item is used to make taxable supplies decreases, the charity will be required to make a repayment to HMRC. Alternatively, if the extent to which the item is used to make taxable supplies increases, the charity will be able to reclaim an additional amount from HMRC.

Normally, there is an adjustment period consisting of five intervals for computers, aircraft, ships, boats or other vessels and ten intervals for land and buildings. The first interval will usually be less than twelve months and usually starts when the capital item is first usedand ends on the day before the start of the next partial exemption tax year. The remaining intervals are normally in line with the partial exemption tax year.

Since January 2011 capital goods scheme adjustments are also required to reflect changes in levels of non-business use of the asset over the adjustment period.

Charities should read VAT Notice 706: partial exemption in conjunction with VAT Notice 706/2: capital goods scheme