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The June Budget introduced legislation to effect changes to the recovery of VAT for immoveable property, boats and aircraft to implement the EU VAT technical directive (Council Directive 2009/162/EU).
As required by the directive, the capital goods scheme rules will be amended to allow for an adjustment mechanism. Revenue & Customs Brief 47/10 publishes the relevant draft legislation.
The technical directive requires all member states to introduce an adjustment mechanism to take account of changes in use of certain assets when VAT recovery is restricted only to the business use of the assets (excluding any private use by the taxpayer or the taxpayer’s staff) from 1 January 2011.
In line with these requirements, HMRC intend to widen the scope of the current the scheme so that it not only caters for changes between taxable and exempt business use, but also for changes between business and non-business use of assets.
This will mean businesses having to complete one adjustment mechanism rather than two.
Ships and aircraft costing £50,000 or more will be included in the scheme to ensure that taxpayers are able to adjust VAT recovery if use changes. Where these assets cost less than £50,000 no adjustments will be needed.
While making these changes, HMRC will take forward the final phase of the three year programme of partial exemption and simplification proposals. The key measures proposed are:
- giving taxpayers the option of seeking approval for a combined method for dealing with taxable, exempt and non-business activities; and
- reducing the administrative burdens on taxpayers whose use of an asset changes only slightly.
The draft legislation will also cover the extra-statutory concession which allows VAT recovery under a capital goods scheme type calculation by a person who was not registered for VAT at the time a relevant asset was acquired. The concession will therefore be withdrawn on the day the legislation takes effect.
HMRC has clarified in the draft legislation that the representative member of a VAT group is the owner for VAT purposes of all capital goods scheme items owned by companies while they are within the group.
The legislation also clarifies who the owner is where there is a transfer of a going concern and other cases where there is a transfer without a VAT supply.
Two consequential amendments are required to implement the 4 January 2011 increase in the standard rate of VAT.
This legislation establishes the invoicing requirements for the supplementary charge arising under the anti-forestalling legislation and sets the new rates and thresholds applicable under the flat rate scheme.
With the exception of the consequential changes required as a result of the VAT rate increase, which will take effect on 4 January 2011, all the amendments outlined in the Brief will take effect from 1 January 2011.
