Capital goods for VAT

What it means

Capital goods for VAT is a category of the VAT Act in its own right and lines up with fixed assets in the accounts only roughly. It covers long-term movable and intangible property above the value threshold the Act sets, buildings, building land, flats and non-residential premises, and also extensions and alterations that needed a building permit.

The Act fixes both the threshold and the list itself, so the two records never quite meet: not every tangible fixed asset reaches the VAT threshold, and an alteration that merely raises a building’s carrying amount in the accounts is an item of its own here, with its own period. The category exists for one reason: the deduction on it does not close with the year of purchase.

The adjustment works both ways. When an asset starts to be used more for taxable supplies, for instance a flat let until now as an exempt supply becomes the company’s office, the payer may increase the deduction for the remaining years. It is not only a trap but also an entitlement, and without records it is lost.

How it works in practice

The period watched is five years for movables and intangibles and twenty for real property and its alterations, running from the year the asset was first used. If the extent of use changes within it, an adjustment of the deducted tax is made for the corresponding fraction, in the last tax period of the year.

Such assets are therefore kept in a record of their own: the date of first use, the amount of input VAT deducted, the use in each year and the pro rata coefficient where one applies. An alteration cleared by the building authority opens a twenty-year period of its own, even though the building is already running one.

When a building is sold to a VAT payer who will use it for taxable supplies, the parties can opt to tax the sale instead of exempting it. The seller then keeps its deduction and the buyer usually accounts for the tax under the reverse charge. Before the purchase agreement is signed, we therefore work out which route suits both sides better.

What to watch out for

Selling a building VAT-exempt inside the watched period counts as a change of use for every remaining year, and the deducted tax goes back in one go. On a building bought a few years ago that is most of the original deduction, and if the sale price never accounted for it, the seller carries it.

Deregistering for VAT within the watched period also counts as a change of use. A sole trader or s. r. o. that deregisters because turnover fell must adjust the deduction on a building or an expensive machine for every remaining year, and that amount is often missing when the decision to deregister is made.