The Capital Goods Scheme (CGS) adjusts the VAT you’ve claimed on high-value assets to reflect how you actually use them over time. If you own commercial property valued over £250,000, this scheme likely affects you—and the implications at the point of sale can be significant.
How the CGS Works
When you reclaim VAT on a qualifying capital asset, HMRC expects that asset to be used for taxable business purposes. The CGS tracks this over an adjustment period:
- Commercial property — 10 years
- Computer hardware, ships, boats, and aircraft — 5 years
Each year, your VAT recovery is reviewed against your actual taxable use. If that use changes, adjustments are made accordingly.
Selling a Capital Item Before the Adjustment Period Ends
This is where many businesses get caught out. If you sell a CGS asset before the adjustment period is complete, you must make a final adjustment that covers:
- The interval in which you sell the asset (calculated normally),plus
- All remaining intervals in the adjustment period
The treatment of those remaining intervals depends on whether the sale is taxable or exempt:
The Risk of an Exempt Sale
If you sell a property without opting to tax, the sale is exempt—and you may face a substantial VAT clawback.
Example:
A fully taxable business purchases a property for £500,000 + £100,000 VAT, reclaiming the VAT in full. Five years later, it sells the property without opting to tax.
- The sale is exempt, so the remaining five years are treated as entirely exempt use.
- Result: The business must repay £50,000 (half the original VAT) to HMRC.
By opting to tax the property before sale, the supply becomes taxable, and no clawback arises.
When the CGS Can Work in Your Favour
If your business is partly exempt and couldn’t recover all the VAT on the original purchase, selling the property as a taxable supply (having opted to tax) could trigger additional VAT recovery on the original purchase price.
Transfer of a Going Concern (TOGC)
If you dispose of a CGS asset as part of a TOGC, you must provide the new owner with the capital item details. The new owner then continues making CGS adjustments for any remaining intervals.
Deregistering from VAT
On deregistration, you’re treated as making adeemed supply of any assets on hand—including CGS items. If that deemed supply is exempt, a VAT clawback may apply, just as with a standard exempt sale.
Part Disposals
If you sell part of a CGS asset, a final adjustment is required for the disposed portion. You’ll continue to make adjustments only on the part you retain.
Key Takeaway
Before selling commercial property, review whether it falls under the CGS. If you’re partway through the adjustment period, opting to tax before the sale can prevent a significant VAT bill.
Disclaimer
This content is for general information only and does not constitute tax, legal, or financial advice. Always seek advice from a qualified professional before making decisions based on your specific circumstances.
