Capital Goods Scheme
Accounting implications for independent schools
The Capital Goods Scheme (CGS) allows independent schools in the UK to recover VAT on significant capital expenditure provided it has been used in the delivery of taxable supplies. It applies to capital items such as land, buildings, and civil engineering works.
Historically, the amount of VAT recovered by independent schools from this scheme has been low, as school fee income was considered an exempt supply, leaving schools unable to reclaim VAT on most capital expenditure due to school fees not being considered a taxable supply.
However, following the introduction of VAT on fees, most school income will now be considered a taxable supply, which has opened the door for much bigger claims under the scheme.
We anticipate that the volume and size of claims made by schools in the year ahead will rise, and with this in mind, it’s useful to understand the key accounting implications for transactions which result from an eligible claim under the scheme.
Key accounting implications:
An eligible claim will result in VAT being recovered through the VAT return over the eligible portion of the remaining 10-year adjustment period (the timeframe during which VAT recovery on significant capital expenditure is monitored and adjusted under the scheme).
This will result in a VAT asset, which will unwind as VAT is reclaimed through the VAT return each year. There is no direct impact on the profit and loss account as the initial recognition of the VAT asset will be offset by an equal and opposite credit to fixed assets.
As the underlying assets have now been reduced in value, the resulting depreciation charge should be recalculated for all future periods over the remaining useful life of the assets.
Example:
School A spent £1.2 million on a sports hall on 1 January 2020, with a useful life of 50 years and was fully used for the delivery of education. It capitalised £1.2million at the time, including 20% VAT (£200k). On 1 January 2025, School A will now need to register for VAT and is eligible to claim under the Capital Goods Scheme.
In this example, there have been five years when education was an exempt supply (1 January 2020 - 31 December 2024) and five years which follow where it will be a taxable supply under the scheme.
Initial recovery (2020-2024) – 0% taxable use and VAT recovery £0, as education was an exempt supply.
Adjustment period (2025-2030) – 100% taxable use from 2025 onwards. The school can reclaim VAT proportionate to the taxable use for each remaining year.
Therefore, School A can reclaim five years of the eligible ten years under the scheme (i.e. 5/10 of the £200k VAT incurred on eligible capital expenditure - £100k). Assuming taxable use remains the same, this £100k will be reclaimed over the next five years at £20k per annum through the VAT return.
Initial recognition
Dr VAT asset £100k
Cr Fixed assets £100k
Year one – five
CR VAT asset £20k
Dr VAT control account £20k
Depreciation
Original depreciation (£1.2m/50) = £24,000
Revised cost (£1.2m - £100k) = £1.1m
Accumulated depreciation to year of CGS claim (£24,000 x 5) = £120,000
NBV immediately prior to CGS claim (£1.2m - £120,000) = £1,080,000
Revised NBV immediately after claim (£1,080,000 - £120,000) = £960,000)
Revised annual depreciation over remaining useful life (£960,000/(50-5)) = £21,333
The table below shows how depreciation might change depending on how many eligible years of the claim period are remaining:
The proportion of taxable use should be reassessed annually, and necessary adjustments made through the VAT return where required each period.
If you have further questions regarding the Capital Goods Scheme, please contact Kieran Smith (VAT queries) or Daniel Haines (accounting queries).
