Tax update: the importance of the Capital Goods Scheme for your housing association

Many housing associations have assets that fall within the Capital Goods Scheme (CGS), for example commercial units, retail property developed by the registered provider and leased to third parties, office accommodation used by the organisation. Historically not all have retained the appropriate information or undertaken the required annual CGS adjustment calculation. This is for good reason as often there is no adjustment required as the use of the asset has not changed. If there is a change in use, however, and you have not maintained the information in the required format then you may be required to painstakingly reconstruct several years’ worth of data.

CGS applies to the following land related supplies:

• Land, where the owner incurs VAT on its acquisition the value of which is at least £250,000.
• A building, or part of a building, where the owner incurs VAT on its acquisition, construction, refurbishment, fitting out alteration or extension the value of which is at least £250,000.
• Civil engineering works where the owner incurs VAT on its acquisition, construction, refurbishment fitting out alteration or extension the value of which is at least £250,000.

If an item qualifies, it requires the owner to adjust the value of VAT incurred by reviewing its actual use over a ten-year period and comparing this to the original intended use at the time the VAT was incurred.

CGS also applies to computers and computer equipment, aircraft, ships, boats or other vessels.  VAT on these assets is adjusted over a five-year period.

As a minimum for each CGS asset housing associations should maintain:

• Details of the CGS expenditure
  • This is important as not all expenditure relating to the property will fall within CGS. This could include a variety of costs, for example, the value of land, if VAT is incurred, development costs, (professional and managerial services including architects, surveyors and site management, demolition and site clearance, building and civil engineering contractors’ services, security, landscaping, fitting out, including the value of any fixtures) but exclude, office furniture, storage unless it’s ‘built in’, carpets, computers and computer equipment.
• Value of VAT originally deducted
  • This is the recovery baseline against which future use will be compared.
• The date the asset is first brought into use (leased, occupied etc).
  • This date is important as it triggers the start of the first CGS adjustment interval.
• Confirmation of use, taxable, exempt, mixed etc.
  • This needs to be (considered) annually.

If the property is used for both taxable and exempt supplies then a CGS calculation should be undertaken each year.

The first CGS adjustment interval is triggered when the building or part of a building is first used or physically occupied and ends on the day before the start of the next tax (VAT) year. Thereafter, it is then undertaken annually. If the level of taxable use increases then the owner will be entitled to recover an additional amount from HMRC, however if it reduces then a repayment will be due to HMRC.

Problems Encountered and Opportunities Lost

The current pandemic has given rise to many organisations considering their property requirements, with some household names announcing a shift towards greater home working, whilst others are thinking about how they will use office space in the future. Housing associations will not be immune from this.

A housing association may have developed retail space in 2015, for example, and at the time of completion opted to tax thereby ensuring that rents are subject to VAT which in turn enabled VAT incurred on the development to be recovered in full. In 2021 the tenant exercises a break clause and vacates the property. The housing association decides to use the space as a community drop-in centre to provide additional support to tenants. This change in use from taxable to exempt will require the housing association to undertake a CGS adjustment if the level of spend on the property was more than £250,000. In this example up to one tenth of the VAT originally reclaimed will need to be repaid to HMRC each year if the use continues to be for an exempt purpose, until the end of the tenth CGS interval. If the required information has not been retained then what would ordinarily be a relatively straight forward task, will become a time-consuming retrospective exercise.

Conversely, a housing association may have acquired a lease in a regional housing office. At the time it paid a lease premium which was subject to VAT and refurbished the property prior to occupation. None of the VAT incurred was recovered. Four years have now passed and the office accommodation is now surplus to requirements and so the housing association intends to sub-lease it to a third party and has opted to tax. This change in use from exempt to taxable will enable the housing association to reclaim VAT previously restricted but only if it can produce a CGS calculation. There has been a change in the finance team and the opportunity is missed!

Finally, there may be less obvious changes. Many head offices will qualify as CGS items, either the acquisition or refurbishment costs. As such expenditure is an overhead of the business, historic VAT recovery may have been calculated using the partial exemption recovery percentage. This percentage often fluctuates on an annual basis and even this fluctuation should be reflected within the CGS calculations. If some rental income is now generated from the property, this can further complicate the issue as per the previous examples.

If your housing association’s CGS asset list is not up to date, or has not been reviewed for some time now would be a good time to make sure that this VAT risk or opportunity is being effectively managed.

Want to find out more about the CGS? Get in touch with our team today.