HMRC have re-emphasised the requirement to determine any business and non-business apportionment of the VAT on capital schemes.  Once this has been done, the non-business portion of the scheme can be considered under COS rules in the normal way.

The effect of this is could mean an increase in VAT recovery where the scheme is associated with taxable income generation, or a decrease in VAT recovery where exempt income is generated.  It could also mean that not all of the professional fees incurred will be eligible for COS VAT recovery under Heading 52 – only that percentage of the fees that relate to the non-business portion of the scheme.  This would however need to be taken into account in the annual partial exemption adjustment so that VAT recovery on COS is not restricted twice.