VAT recovery and the capital goods scheme

Partial exemption

In this scenario, the clubhouse consists of a bar and restaurant, changing rooms for the golfers and a retail shop selling equipment.

Playing fees and subscription income for a non-profit-making members’ sports club are exempt from VAT. However, catering income and sales of goods are taxable, which means that the clubhouse is used for both taxable and exempt purposes. Input tax can be partly claimed under the rules of partial exemption.

VAT on mixed costs is described as “residual input tax” in HMRC’s guidance. 

Input tax to claim

The club’s initial input tax claim on the improvement works will be based on its existing partial exemption method. This will usually be the standard method - based on the percentage split between taxable and exempt income for each VAT period - unless the club has agreed a special method with HMRC. A special method is any that is not the standard method, for example one based on the split of floor area in the clubhouse.

All quarterly input tax claims will be subject to a partial exemption annual adjustment up to 31 March, 30 April or 31 May, depending on the VAT periods. The purpose of the adjustment is to even out any seasonal fluctuations that might occur with the quarterly calculations.

The annual calculation is compulsory for both standard and special methods and it always supersedes the quarterly figures.

Capital goods scheme

The partial exemption calculations - quarterly and annual - are not the end of the story. As the project cost exceeds £250,000 excluding VAT, the club must review its input tax claim over a ten-year period because of the need to comply with the capital goods scheme (CGS).

The CGS means that one tenth of the total input tax of £100,000 is reviewed for each partial exemption tax year for the following nine years after the initial claim. Any VAT adjustment is then included on the following return that includes 30 September, i.e. September, October or November returns. The same partial exemption method is used as for the initial claim.

Example. Let’s assume that our golf club initially claimed £30,000 input tax on the project costs on the basis that 30% of the club’s income in the first partial exemption year was taxable. In the following partial exemption tax year, the percentage of taxable income increased to 35% of total income because the bar opening hours were extended. The club can claim an extra £500 with the first capital goods scheme adjustment: £100,000 x 1/10 x 5% = £500.

If the percentage of taxable income decreases compared to year one, this will lead to annual CGS adjustments where tax is payable to HMRC.

If you fail to make an annual adjustment with the CGS, this will be an error and must be corrected within the usual error correction procedures.