The cost of operating the capital goods scheme can be avoided if capital items are leased instead of purchased. To this end, many businesses may set up their own separately registered leasing companies. If such leasing companies make only taxable supplies, they can recover all the input tax on purchases in full, although output tax must be charged on the lease rental. Thus, by setting up leasing companies a significant cash-flow advantage for a partially-exempt business could arise.

Example: Leased equipment

Albert Ltd, a subsidiary leasing company, purchased computer equipment in the UK and incurred VAT of £35,000.

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