VAT Partial Exemption and the Capital Goods Scheme

If you make both taxable and exempt supplies from property, you cannot recover all your VAT. Partial exemption and the Capital Goods Scheme decide how much you get back, and they catch out property investors.

Partial exemption

If some of your income is VAT-exempt (rent from property you have not opted to tax) and some is taxable (opted rent, or other standard-rated supplies), you are partly exempt. You can only recover input VAT that relates to your taxable supplies, plus, within limits, VAT that relates to both. VAT attributable to exempt supplies is generally not recoverable, subject to small de-minimis limits.

The Capital Goods Scheme

For large property spends, broadly land and buildings costing 250,000 pounds or more, the Capital Goods Scheme spreads the input VAT recovery over a period, usually ten years, and adjusts it each year if the taxable and exempt use of the property changes. So if you recover VAT on a refurbishment and later change the use, your recovery can be clawed back or increased over the adjustment period.

Why it matters

A landlord who recovers VAT on a big refurbishment on the basis of taxable use, then lets to an exempt tenant or stops charging VAT, can face a clawback under the scheme. The recovery is not final at the point of spend.

Take VAT advice

Partial exemption and the Capital Goods Scheme are technical and easy to get wrong. Where you have mixed supplies or large property spends, take VAT advice. See VAT on commercial property.

What is VAT partial exemption?

Where you have both exempt and taxable supplies, you can only recover input VAT relating to the taxable ones, subject to small de-minimis limits.

What is the Capital Goods Scheme?

For property spends of 250,000 or more, it spreads input VAT recovery over ten years and adjusts it if the property's use changes.