VATGPB4630 - Section 33 bodies: capital projects and other adjustments: capital item adjustments
Introduction
Change from taxable or non-business to exempt use
Change from exempt to taxable or non-business use
Change in VAT liability
Introduction
Where the use of a capital item, as defined by regulation 113 of the VAT Regulations 1995 (SI 1995/2518), in making exempt supplies changes, the section 33 body is required to adjust to the amount of VAT reclaimed on the initial purchase. For this purpose a change in exempt use from 1 April 1998 includes both a change from taxable to exempt and from non-business to exempt and vice versa. Accounting adjustments should be carried out in accordance with the guidance in Notice 706/2 ‘Capital goods scheme’ (external users can find the notice at http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.por…).
Change from taxable or non-business to exempt use
If a change in use involves an increase in the extent to which an item is used for making exempt supplies, an adjustment should be calculated. However, the result is not to be treated as exempt input tax for the purposes of the refund calculation for the year in question and does not count towards the insignificance test.
Where, at the end of the year, the body remains within the insignificance test, no further action need be taken in respect of the capital goods scheme adjustment. However, if the body exceeds the insignificance test (see VATGPB4510) the adjustment previously calculated is to be repaid at the same time as the exempt input tax.
Change from exempt to taxable or non-business use
If the change in use involves a decrease in the extent to which an item is used for making exempt supplies, an adjustment should again be calculated. Similarly the result is not to be treated as input tax for the purposes of the refund calculation for the year in question and does not count towards the insignificance test.
Where the VAT incurred on the purchase of the item was recovered in full because in that year the body met the insignificance test, no further action need be taken in respect of the adjustment. However, if some or all of the VAT on the purchase of the item was restricted because the body exceeded the insignificance test in that year, the adjustment amount can be reclaimed in line with other adjustments following the refund calculation.
Section 33 bodies should keep a record of relevant capital items and the amount of tax initially incurred and claimed because, although they may originally meet the insignificance test, an adjustment may be required several years later if the insignificance test is subsequently breached.
Change in VAT liability
A section 33 body may incur VAT which it attributes to an intended supply, but before that supply takes place there is a change in law or HMRC policy that has the effect of changing the VAT liability of the supply. In that event there is no requirement to retrospectively change the original attribution of the VAT.
The VAT is either recoverable or is treated as exempt input tax based on the position at the time it was incurred. There is no need to revisit the refund calculation for the year in which the VAT was originally incurred.
Any VAT incurred after the VAT liability of the supply to which it relates changes to exempt will be exempt input tax. Conversely, VAT incurred after the VAT liability of the supply changes from exempt will be recoverable in full.
If, during the year in which the VAT was incurred, the level of exempt input tax breached the insignificance test with the result that the VAT was irrecoverable, there can be no retrospective recovery of the VAT that was restricted.