Background
1902.The capital goods scheme is relevant to businesses that, under VAT legislation, make both exempt and non-exempt supplies. These traders are known as “partially exempt traders”. When a VAT-registered business incurs VAT on its purchases (input tax), it can usually offset these amounts against the tax it owes to HM Customs & Excise on its sales (output tax). However, partially-exempt businesses are not able to do so in respect of purchases attributable to exempt sales (or “supplies”).
1903.Generally with VAT, the rules for capital expenditure do not differ from the rules for revenue items. However, the capital goods scheme is an exception. For certain types of capital expenditure, it is necessary for partially-exempt businesses to make an annual adjustment over a period of five or ten years so that the reclaimable input tax reflects the proportion of use attributable to the making of non-exempt supplies during the period.
1904.The types of expenditure covered by the scheme can be broadly divided into three categories:
computers or computer equipment worth £50,000 or more;
land and buildings worth £250,000 or more; and
building works worth £250,000 or more.
Adjustments are made over a five-year period in respect of the first category; and they are made over a ten-year period in respect of the other categories.
1905.It is a general principle of income tax and corporation tax that any non-recoverable VAT should be relieved as a cost for direct tax purposes. When the capital goods scheme was introduced in 1990, it became necessary to ensure that the capital allowances provisions could cater for VAT adjustments made under the Scheme so far as they related to expenditure covered by CAA 1990. The legislation to do this was introduced in FA 1991. And to simplify matters, the legislation was only introduced to cover cases in which the original expenditure was covered by the rules for plant and machinery allowances, industrial buildings allowances or R&D allowances.
1906.Broadly under these rules, if a taxpayer incurs an additional VAT liability (because the proportion of exempt use has risen) then the additional VAT liability is treated as additional capital expenditure incurred. And if a taxpayer receives an additional VAT rebate (because the proportion of exempt use has fallen) then the taxpayer is treated as receiving disposal proceeds equal to the amount received. However, the rules differ between the various Parts. This reflects the different schemes for allowances and charges under these Parts.
Section 546: Introduction
1907.This section is new and introduces the Chapter.
Section 547: “Additional VAT liability” and “additional VAT rebate”
1908.This section is based on section 159A(6) of CAA 1990. It provides a definition of the terms “additional VAT liability” and “additional VAT rebate”.
Sections 548 and 549: Time when additional VAT liability or rebate is incurred, made, accrues etc.
1909.These sections are based on section 159A of CAA 1990. They determine when additional VAT liabilities and rebates are treated as arising.
1910.Section 159A(1) to (4) of CAA 1990 determines when additional VAT liabilities and rebates are treated as arising for the purposes of CAA 1990. It is clear that such rules are necessary to ensure that calculations of allowances and charges reflect the additional VAT liabilities and rebates in the correct chargeable periods.
1911.The legislation, however, provides two different sets of rules to determine the time an additional VAT liability or rebate is treated as arising. One of these sets of rules is applied when determining in which chargeable period a liability or rebate is to be brought into account (or for which chargeable period an allowance or charge is to be made under the 1990 Act). The other set of rules is used in all other circumstances. In particular, it is used when the legislation requires certain conditions to be met at the time when the additional VAT liability or rebate arises.
1912.However, there are instances in which the same terminology is used with two different meanings in the same sentence. This Act has removed this obstacle to the understanding of the rules and uses two different labels to refer to the two different sets of rules.
1913.The time, determined in CAA 1990 by section 159A(1) and (2), is now referred to as the time when the additional VAT liability is incurred or the additional VAT rebate is made. This is the meaning that applies in all cases except when determining the chargeable period in which a liability or rebate is to be brought into account (or for which chargeable period an allowance or charge is to be made under the 1990 Act). This is dealt with in section 548.
1914.The time, determined in CAA 1990 by section 159A(3) and (4), is now referred to as the time when the additional VAT liability or rebate accrues. This is dealt with in section 549. This time will generally be later than the time determined in section 548.
1915.One advantage of using the later time in the legislation is to ensure that the appropriate capital allowances calculations do not generally need to be made until after the adjustment has been calculated for VAT purposes.
1916.Section 159A(4) of CAA 1990 may appear to determine only the chargeable period in which the additional VAT liability or rebate arises (or in the language of the new Act “accrues”). But CAA 1990 requires in various provisions the time (rather than just the chargeable period) in which the additional VAT liability or rebate accrues. This Act provides this. See Note 70 in Annex 2.
Section 550: Apportionment of additional VAT liabilities and rebates
1917.This section is based on section 159A(5) and part of section 159A(7) of CAA 1990. It deals with cases in which it is necessary to apportion either the qualifying expenditure or the allowances or charges arising.
1918.In such cases, any additional VAT liability or rebate is subject to the same apportionment.
Section 551: Supplementary
1919.This section is based on section 159A(6) and part of section 159A(7) of CAA 1990. It provides definitions of terms used in the Chapter.
Chapter 3: Disposals of oil licences: Provisions relating to Parts 5 and 6
Overview
1920.This Chapter provides rules relating to the disposal of oil licences for the purposes of Parts 5 (mineral extraction) and 6 (research and development).
1921.These rules, whilst important to those concerned with the oil industry, are likely to be used by a minority of the users of either Part 5 or 6. They are dealt with here as they share many definitions in common but do not belong naturally in either Part 5 or Part 6.
1922.The rules require the “seller” and “purchaser” of certain interests in oil licences, related to undeveloped areas, to treat part of the consideration as having nil value. They also provide for the “recapture/reduction” of R&D allowances in certain cases in which an oil licence is disposed of.
Section 552: Meaning of “oil licence” and “interest in an oil licence”
1923.This section is based on sections 118A(4) and 138A(4) of CAA 1990, section 12(1) of OTA 1975 and section 196(5) of TCGA 1992.
1924.The section provides definitions for the purposes of this Chapter. Unlike section 118A(4) of CAA 1990 there is no reliance on cross-references to section 194 of TCGA 1992.
Section 553: Consideration to be treated as nil
1925.This section is based on parts of section 118A of CAA 1990 and section 196 of TCGA 1992. Section 118A is in Part IV of CAA 1990 but also has effect for Part VII of CAA 1990.
1926.The section treats certain consideration as having no value on the disposal of an oil licence relating to an undeveloped area.
1927.Disregarding some of the consideration affects the allowances and charges in Parts 5 and 6 that are associated with the acquisition or disposal of the oil licence concerned. Broadly, the “seller” may suffer a lower balancing charge and the purchaser may get lower allowances if this section applies.
1928.Subsection (3) might seem to use a different definition of “material disposal” from section 118A(2) of CAA 1990 but this is not the case. See Note 71 of Annex 2.
Section 554: Circumstances in which oil licence relates to undeveloped area
1929.This section is based on section 118A(4) of CAA 1990, section 12(1) of OTA 1975 and section 196 of TCGA 1992. It determines when an oil licence relates to an undeveloped area without using a cross-reference to section 194 of TCGA 1992.
Section 555: Disposal of oil licence with exploitation value
1930.This section is based on section 138A of CAA 1990.
1931.When the section applies, part of the consideration for the oil licence is treated for the purpose of Part 6 (research and development) as if it were for the disposal of an asset representing qualifying expenditure. That treatment can lead to a recapture of R&D allowances given in relation to that qualifying expenditure.
Section 556: Minor definitions
1932.This section is based on sections 64A(12), 118A(4) and 138A(4) of CAA 1990, sections 1(1) and 12(1) of OTA 1975 and section 196 of TCGA 1992. It deals with minor definitions for the purposes of this Chapter.
Chapter 4: Partnerships, successions and transfers
Overview
1933.This Chapter provides rules for the transfer of and succession to trades and for the continuity of partnerships.
1934.Section 557 gives the application of sections 558 and 559. Section 558 provides for the continuity of allowances to partnerships. Section 559 deals with transfers on succession without sale.
1935.Section 560 provides rules for the transfer of insurance company businesses and section 561 deals with the transfer of a UK trade from a company resident in one European Union member state to a company resident in another.
