Capital Asset Scheme
Under the Capital Asset Scheme, the input tax initially recovered is adjusted based on the actual use of a capital asset during a specific period.
A capital asset for these purposes is a single item:
Costing AED 5,000,000 or more on which VAT is payable; and Having an estimated useful life of at least 10 years for buildings or at least 5 years for all other assets. (Art. 57 of the Regulations)
Where costs are settled in stage payments, as is often the case for buildings, the overall cost is considered as one sum. (Art. 57(3) of the Regulations) Stock is specifically excluded from the capital asset scheme. (Art. 57(2) of the Regulations)
The Operation of the Scheme:
The initial recovery of input tax when a capital item is purchased follows the normal rules. In the VAT period of acquisition input tax recovery is claimed subject to any partial exemption position. This is the normal method for input tax recovery, but it is not appropriate to leave it at that for some capital assets. These are assets over a number of years. Years for these purposes are VAT years. The first VAT year for an asset starts on the date it was purchased. The accounting date of the business for direct taxes is not relevant. For qualifying capital assets, the input tax recovery is effectively based on a longer period of account, with adjustments made where necessary.
The length of the adjustment period in years depends on the type of asset. (Art. 57(1) of the Regulations)
The recovery period for buildings is 10 years.
The recovery period for other capital assets is 5 years.
Year 1 will always be the year of first use and this recovery is calculated as normal. This effectively means we have to consider a further 9 adjustments for buildings and a further 4 for other relevant assets.