ACCA Advanced Taxation (ATX) Practice Exam

For CGS (VAT) adjustments, what is the correct formula?

1. Total original input VAT divided by 5

2. Total original input VAT multiplied by the change in percentage

3. Total original input VAT divided by 10 multiplied by the change in percentage

4. Total original input VAT plus 10% of the change

The correct answer is: Total original input VAT divided by 10 multiplied by the change in percentage

The correct formula for making adjustments to the Capital Goods Scheme (CGS) VAT is based on a specific calculation involving the original input VAT and the change in percentage applied to that input VAT. When a business makes a capital investment that incurs VAT, it can initially claim that VAT back as input tax. However, if the use of that asset changes in future periods, the business must adjust the amount of VAT claimed in line with the usage change, which is where the Capital Goods Scheme comes into play. The formula states that to calculate the adjustment needed, you first take the total original input VAT. This figure accounts for the VAT that was originally reclaimed when making the purchase of the asset. By dividing this amount by 10, you are effectively determining the annual VAT claim related to the capital asset over a 10-year period, which aligns with the typical CGS adjustment period. By then multiplying this annual amount by the change in percentage (which reflects how much the use of that asset has changed), you derive the correct VAT adjustment that must be reported. This methodology ensures that the adjustment reflects the precise change in use percentage and aligns with the VAT regulations as per the Capital Goods Scheme guidelines. By contrast, the other options do not accurately represent how