How to apply the Capital Goods Scheme

The Capital Goods Scheme (CGS) is a complex set of rules which present a number of challenges not least because the values associated with capital items inevitably mean that any errors in the application of the rules can be costly, in terms of VAT and potential penalties. It is important to remember, however, that the scheme is designed to ensure that the recovery of VAT on capital items is fair and reflects the true business usage. This article sets out how the scheme works, issues surrounding the disposal of a capital item including the application of the ‘disposal test’, consequences of the cessation of taxable supplies as well as the scheme’s relevance to business transfers. The article also includes examples of how to make adjustments under the CGS.