ACCA Advanced Taxation (ATX) Practice Exam

In the context of CGS, what happens if a disposal is classified as a taxable supply?

1. It leads to a full exemption from VAT

2. It is treated as 100% taxable use

3. It is subject to additional penalties

4. It means a loss of input VAT recovery

The correct answer is: It is treated as 100% taxable use

When a disposal is classified as a taxable supply in the context of Capital Goods Scheme (CGS), it is treated as 100% taxable use. This classification indicates that the disposal is subject to VAT, which means the entity involved is allowed to recover input VAT related to that asset fully. This is significant because the CGS is designed to allow businesses to reclaim VAT on capital assets based on their taxable use over time. When an asset that has been subjected to VAT is sold or disposed of, if the transaction is classified as a taxable supply, this means that the asset was used in a manner that entitles the business to recover all the input VAT initially claimed when the asset was acquired. This full recognition of taxable use helps to maintain a proper flow of VAT through the business's financial dealings, aligning with VAT's principle of neutrality. In contrast, if a supply was exempt or not taxable, it could lead to a limitation on the recovery of input VAT associated with that asset. Therefore, understanding the classification of disposals is crucial for businesses that wish to utilize their VAT recovery fully.