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In Business Brief 47/2010 (http://www.hmrc.gov.uk/briefs/vat/brief47010.htm ) HMRC announced a number of changes to be made to the Capital Goods Scheme (CGS) as a result of the EU VAT Technical Directive (2009/162/EU).

The scope of the CGS will be expanded to include ships and aircraft costing more than £50,000 in addition to and computer hardware; and to deal with business/non-business use during the adjustment period of the scheme and not just taxable/exempt use. The VAT accounting using the amended CGS will replace the Lennartz method of accounting for private use that some owners of part business-part private use assets.

HMRC has also indicated that they will make some amendments to the scheme that will simplify its operation, most notably to ignore minor change of use adjustments (whether in favour of HMRC or the taxpayer).

This will be an interesting development to a scheme which many feel is largely ignored (or not complied with as strictly as it ought to be). Extending its scope to cover other expensive assets is perhaps an inevitable step to reducing manipulation of supplies of assets and their temporary use to secure a level of input tax recovery that might not be justifiable according to how they are used over a period of several years. This change to the VAT treatment of aircraft follows recent changes to the zero rate for supplies of aircraft, so it only applies to those used on international routes, which means that more purchasers of aircraft will have to pay VAT and so will need to take account of the CGS for five years after their purchase.

Links to the draft legislation and detailed information are provided in the Business Brief itself.

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