Revenue has published an article from Tax Briefing Issue 3 which sets out the some of the direct tax implications of VAT Capital Goods Scheme (CGS) adjustments. Readers will be aware that the CGS is a mechanism for regulating deductibility over the 'VAT-life' of a developed property and applies to property that is developed or acquired on or after 1 July 2008.
The CGS scheme requires an annual review of the use to which the property is put, in terms of taxable or exempt use, over the VAT-life of the property. Where there is a change in the proportion of use for taxable purposes for any year in comparison with the use in the initial twelve months, an adjustment of a proportion of the VAT deductibility will be required. These CGS reviews will have no consequences for most property transactions as a person will generally be engaged in either fully taxable or fully exempt activities. However, where there are CGS adjustments, the 'knock-on' effects on the direct taxes must be considered.
The article looks at the impact of a CGS adjustment on capital allowances, capital gains tax and stamp duty. The article also outlines Revenue's approach in dealing with compensation type payments made to a person who has incurred an additional tax liability as a result of adopting a particular course of action due to the CGS scheme. These compensation type scenarios and the direct tax implications were discussed in detail with Revenue through the TALC forum.
The article also sets out a number of practical examples which illustrate some of the direct tax implications of a CGS adjustment.
The full Tax Briefing article is available here.