Capital Assets - VAT Treatment

    4 years ago


Capital Assets - VAT Treatment

As per the VAT, the treatment of transaction of capital goods is different from other transactions. In this article we are covering input tax on a purchase of capital goods, adjustment of input tax, change in the way taxable person uses the asset.

What is Capital Goods

Capital goods are tangible assets such as buildings, machinery, equipment, vehicles and tools that an organization uses to produce goods or services in order to produce consumer goods and goods for other businesses. A capital asset is an asset that has a useful life longer than one year and is not intended for sale during the normal course of business.

Adjustment Period

The adjustment periods gives an opportunity to review the business use of capital assets over time. If there's a change in use of capital assets, the taxpayer needs to make an adjustment to the input tax credit to ensure the claim of the right amount of VAT input credits.

The Adjustment Period in respect of which adjustment under this article is

  1. Six (6) years in respect of movable tangible or intangible Capital Assets and
  2. Ten (10) years in respect of immovable Capital Assets which are permanently attached to land or Real Estate.

starting from the date of purchase of the Capital Asset by the Taxable Person.

If the life of the Capital Asset determined in accordance with the accounting practice of the Taxable Person be less than the adjustment Period, the Adjustment Period shall be the life of the Capital Asset, with any part years counting as one year.

Change of Intended use

Change of intended use of capital asset means

  1. Asset no longer being used for taxable activities
  2. Deposal of capital asset
  3. Temporary change in use of capital asset
  4. Destroy or stolen or no longer usable

Input credit of Capital Goods & Adjustment

At the time a Taxable Person acquires a Capital Asset, Input Tax shall initially be deducted in accordance with the intended use of the Goods.

Adjustment of Input credit

During the Adjustment Period, an adjustment to the deduction must be made following any year in which the actual use of the Capital Asset differs from that initial intended use.

A Taxable Person shall adjust previously deducted Input Tax in relation to a Capital Asset in cases where the Taxable Person’s Input Tax decreases or increases as a result of a change in the way the Taxable Person uses the asset or a change in the VAT status of such use.

In cases where there is no change in the use of the Capital asset from the initial intended use in any year, the Taxable Person is not required to adjust Input Tax in respect of that Capital asset for that year.

End of every twelve month

At the end of each twelve-month period, a Taxable Person shall calculate the amount of Input Tax potentially subject to adjustment using the fraction:

Initial Input Tax deduction/ Adjustment Period

and shall make an adjustment to the amount of the Input Tax deducted, based on the actual use of the Capital Asset during that year.

Example:

ABC Ltd purchases a property on 13 September 2018. The cost of the property is SAR 1,000,000 + VAT SAR 50,000. This is the total tax incurred. ABC Ltd reclaims all of this VAT on the basis that the company intends to put the property to a fully taxable use.

At the end of the second interval, ABC Ltd calculates that the use to which the property is put during the second interval was 80% taxable. As ABC Ltd claimed 100% of the VAT charged, it is obliged to make an adjustment (because there is a difference between these two figures) and repay the excess amount claimed.

For the purposes of the adjustment, ABC Ltd must calculate the total reviewed reclaimed amount which is calculated by multiplying the total tax incurred by the initial interval proportion of reclaimed use (80%):

The adjustment required at the end of the second twelve-month is calculated as the difference between the amount of the VAT claimed and the total reviewed deductible amount:

Assume that movable property total adjustment period as per law is 6 years.

capitalasset

For the purposes of the adjustment, the first twelve-month period shall commence from the start of the Tax Period in which the Capital Asset was acquired, and each subsequent twelve-month period shall begin following the end of the preceding twelve-month period for that Capital Asset. The Taxable Person shall make the adjustment to Input Tax in the Tax Return for the last Tax Period which falls in the twelve months period, and shall accordingly either claim an additional amount of Input Tax or make a repayment of Input Tax.

Example:

ABC Ltd purchases a property on 13 September 2018. The cost of the property is SAR 1,000,000 + VAT SAR 50,000. This is the total tax incurred.

First twelve month will be 1St September 2018 to 31st August 2019 (If tax period is monthly)

Enhancement of Existing capital asset

Capital expenditure incurred on a Capital Asset already owned by the Taxable Person (to construct, enhance or improve it) counts as expenditure or additional expenditure acquiring it and the Adjustment Period (or additional adjustment period) for such expenditure shall commence on the date of completion of such works.

Disposal of Asset

In cases where there is a permanent change in the use of a Capital Asset due to the sale or disposal of the Capital Asset by a Taxable Person, the Taxable Person must adjust the Input Tax deduction for the remainder of the Adjustment Period for that Capital Asset in the Tax Period in which it is sold.

Permanent loss of Capital asset, destroyed or stolen

No adjustment to the Input Tax deducted for the remainder of the Adjustment Period is needed if the Capital Asset is destroyed or stolen or ends its useful life earlier than accounted for.

Permanent Change of intended use

In cases where there is a permanent change in use of a Capital Asset due to that Capital Asset no longer being used for the Taxable Activities of that Taxable Person, no adjustment to Input Tax is made but the Taxable Person shall be considered to make a Nominal Supply of the Capital Asset in accordance with the Agreement. The value of such Nominal Supply shall be calculated using the following formula:

(Purchase value of Capital Asset x Initial Recovery Percentage x Remaining Useful Life)/Adjustment Period

where the Remaining Useful Life is the Adjustment Period determined in accordance with the above paragraph of this article less the number of part or full years during which the Taxable Person has used the Capital Asset, and the Initial Recovery Percentage is the recovery percentage determined in accordance with the intended use of the Goods at the time of purchase as calculated in accordance with this article(52).


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