Changes to Capital Goods Scheme for VAT: What UK Businesses Need to Know

A client came to APEX last year partway through refurbishing a mixed-use building — offices upstairs, a partly exempt letting downstairs. The spend sat just above the old £250,000 capital goods scheme threshold, which meant ten years of annual VAT adjustments to track and defend. Under the rules that now apply, that same refurbishment would fall outside the scheme entirely. From 29 July 2026, HMRC will raise the Capital Goods Scheme threshold for land, buildings and civil engineering work from £250,000 to £600,000 and will remove computers from the scheme altogether. This is the biggest change to CGS since it was introduced in 1990, and it will pull thousands of smaller property transactions out of a notoriously complex compliance regime.

Quick answer:

• The Capital Goods Scheme (CGS) threshold for land, buildings and civil engineering works rises from £250,000 to £600,000 (excluding VAT) from 29 July 2026.
• Computers and computer equipment are removed from the CGS entirely from the same date — the old £50,000 threshold no longer applies to them.
• The change only affects capital expenditure incurred on or after 29 July 2026; anything already committed under contract before that date follows the old rules.
• It’s made via secondary legislation amending regulations 113 and 114 of the VAT Regulations 1995 (SI 1995/2518) — this is a confirmed HMRC measure, not a consultation proposal.
• HMRC estimates the change will save affected businesses roughly £0.6 million a year in administrative costs, with negligible Exchequer impact.

What is the Capital Goods Scheme for VAT?

The Capital Goods Scheme for VAT is an adjustment mechanism that spreads the recovery of input tax on certain high-value assets over several years, rather than allowing a single claim at the point of purchase. It exists to stop businesses over- or under-claiming VAT when the taxable use of an asset changes after acquisition.

Under current law, two categories of asset fall within CGS:

• Land, buildings and civil engineering works, where capital expenditure is £250,000 or more (excluding VAT) — adjusted over 10 successive intervals.
• Computers and computer equipment, where capital expenditure is £50,000 or more — adjusted over 5 successive intervals.

Once an asset is inside the scheme, the business must revisit the VAT recovery percentage every year for the length of the adjustment period, comparing the asset’s actual taxable use against the baseline set in year one. 

If taxable use rises, HMRC repays more VAT; if it falls, the business repays VAT already claimed. A change of use on disposal within the adjustment period can trigger a single, larger reconciliation covering all the remaining years at once.

 Businesses that are fully taxable are not automatically exempt from this – a change from taxable to exempt use, such as an office building later let on an exempt basis, can still trigger a clawback even where the business recovers all its VAT elsewhere.

Read: VAT on Online Marketplace Sales: What UK Sellers Need to Know About the New HMRC Consultation

What’s changing under the Capital Goods Scheme simplification?

HMRC is making two specific changes to CGS from 29 July 2026, confirmed in its policy paper on the simplification of the scheme. The threshold for land, buildings and civil engineering works increases, and computers leave the scheme completely.

• Higher property threshold: the £250,000 trigger for land, buildings and civil engineering works rises to £600,000 (excluding VAT). Expenditure below that level will no longer create a CGS item at all.
• Computers removed entirely: computers and items of computer equipment are taken out of the scheme’s scope. The old £50,000 threshold and 5-interval adjustment period for computer equipment cease to apply.

The legal mechanism is an amendment to Part XV of the VAT Regulations 1995 (SI 1995/2518). Regulation 113(2) is amended to remove the reference to computers and computer equipment, and regulation 113(4) is amended to raise the property threshold, with consequential changes to regulations 113A and 114.

When do the new CGS rules take effect?

The changes take effect on 29 July 2026 and are not retrospective. Capital expenditure incurred before that date — meaning goods or services already received, or goods already imported or acquired — continues to be governed by the old £250,000 and £50,000 thresholds, even if the asset’s adjustment period runs on for years afterwards.

In practice, this means:

• A property purchase or refurbishment where the tax point falls before 29 July 2026 is tested against the old £250,000 threshold, regardless of when the deal completes on paper.
• A property purchase or refurbishment where the tax point falls on or after 29 July 2026 is tested against the new £600,000 threshold.
• Assets already inside CGS under the old rules stay inside CGS and continue their existing adjustment period — the threshold change does not remove them from the scheme retroactively.

Businesses part-way through a phased development that straddles the date should take advice before assuming which threshold applies, since the transitional rule is based on when expenditure is incurred, not when the wider project is signed off.

How does the higher £600,000 threshold work in practice?

A capital project only falls within CGS if its VAT-exclusive cost meets or exceeds the relevant threshold — everything below that line is recovered under normal partial exemption rules with no ongoing adjustment obligation. Here’s how that plays out for a typical partly exempt business.

Example: 

A dental practice buys and fits out a new clinic building for £400,000 (excluding VAT), incurring £80,000 of VAT. Under the current £250,000 threshold, that expenditure falls within CGS, committing the practice to ten years of annual adjustment calculations as its mix of NHS and private (exempt/taxable) work shifts. 

Under the new £600,000 threshold, the same £400,000 spend falls outside the scheme entirely. The practice recovers VAT once, under its normal partial exemption method, with no ten-year tail of adjustments to monitor or defend at inspection.

The same logic applies to refurbishments. A £900,000 refurbishment of an existing building still crosses the new threshold and remains a CGS item in its own right, tracked separately from the underlying property. Businesses working close to £600,000 should model the VAT position before committing to a build contract, since structuring the spend (or timing it either side of 29 July 2026) can determine whether ten years of adjustment obligations apply.

Why is HMRC removing computers from the Capital Goods Scheme?

HMRC says the computer category has become redundant because the cost of qualifying equipment has fallen well below the £50,000 threshold since the scheme was introduced in 1990, so it is very rarely triggered in practice. Removing it eliminates a compliance obligation that HMRC itself acknowledges delivers little practical benefit for the Exchequer.

The wider reform follows a long consultation history. The government launched a Call for Evidence in July 2019, after the 2017 Office of Tax Simplification VAT review flagged CGS as unnecessarily burdensome for smaller businesses. A summary of responses was published in March 2021, and the specific threshold and computer changes were formally announced on 28 April 2025 as part of the government’s Tax Update: Simplification, Administration and Reform work. HMRC’s own impact assessment projects negligible Exchequer cost and estimates ongoing administrative savings for businesses of around £0.6 million a year, concentrated among smaller property owners who previously fell within scope simply because of rising property values.

Who is affected by these changes to VAT on capital expenditure?

The changes affect any VAT-registered business incurring capital expenditure on land, buildings, civil engineering works, or computer equipment. In practice, the businesses most affected fall into a few groups.

• Partly exempt businesses — including care providers, financial services firms, education providers and charities — who mix taxable and exempt income and have historically had to track CGS adjustments on modest property purchases.
• Property investors and developers carrying out refurbishments or fit-outs in the £250,000–£600,000 band, who will now fall outside the scheme altogether.
• SMEs buying or improving commercial premises, for whom the old threshold had become disproportionate as property values rose since 1990.
• Any business holding computer equipment previously caught by the £50,000 threshold, which will simply stop being a CGS consideration from 29 July 2026.

Wholly taxable businesses are not exempt from the practical effects either — even a fully taxable business can find a change of use (for example, letting out surplus space on an exempt basis) crystallising a CGS liability, so the higher property threshold is a genuine simplification for that group too.

Also Read: Getting Your Business Ready for the Summer’s Temporary VAT Cut

What should businesses do to prepare?

Businesses with capital projects planned for mid-to-late 2026 should establish now whether their expenditure will fall inside or outside CGS once the new threshold applies. Three practical steps matter most.

• Identify the tax point for any pending land, building or civil engineering spend, since that — not the completion date of the wider project — determines which threshold applies.
• Review existing CGS records for assets already inside the scheme under the old £250,000 or £50,000 thresholds; these continue on their original adjustment period regardless of the reform.
• Reassess partial exemption methods where CGS previously drove the choice of method, since removing an asset from CGS can change what special method (if any) is still worthwhile.

FAQs About HMRCs Changes To Capital Goods Scheme

Does the Capital Goods Scheme only affect partly exempt businesses?

No. While partly exempt businesses are most exposed, a fully taxable business can still be caught if the use of an asset later changes — for example, letting out space that was originally used for taxable trading. The scheme is triggered by a change in use, not by a business’s overall VAT status at the time of purchase.

What happens if I sell a capital item during the adjustment period?

Selling a capital item during its adjustment period crystallises all the remaining years’ adjustments in a single calculation, made in the VAT return covering the sale. If the sale itself is a taxable supply, the remaining intervals are treated as 100% taxable use; if it’s exempt, they’re treated as 0% taxable use, which can produce a significant one-off VAT repayment or claim.

Do the new thresholds apply retrospectively to buildings I already own?

No. The higher threshold only applies to capital expenditure incurred on or after 29 July 2026. Assets that were already inside the Capital Goods Scheme under the £250,000 or £50,000 thresholds remain inside the scheme and continue their existing adjustment period unaffected.

Is this confirmed law or still a proposal?

This is confirmed government policy, implemented through secondary legislation amending the VAT Regulations 1995, with an operative date of 29 July 2026 set out in HMRC’s published policy paper. It is not a consultation or draft proposal at this stage, though businesses should always check GOV.UK for the final statutory instrument reference nearer the commencement date.

Do I need an accountant for Capital Goods Scheme calculations?

Most businesses benefit from professional support, particularly where a project sits close to the £600,000 threshold or where partial exemption percentages fluctuate year to year. Getting the baseline interval wrong, or missing a change-of-use trigger, can lead to VAT assessments and penalties several years after the original purchase.

What if my capital expenditure is close to the £600,000 threshold?

Where spend is close to the threshold, timing and contract structuring can determine whether the Capital Goods Scheme applies at all. It’s worth taking advice before committing to a build contract, since expenditure incurred just before 29 July 2026 is tested against the old £250,000 limit even if the wider project completes later.

Next steps

If you’re planning capital expenditure on property, refurbishment or equipment in the run-up to this change, it’s worth reviewing the VAT treatment before contracts are signed rather than after. Apex Accountants & Tax Advisors works with property owners, developers and partly exempt businesses across the UK to assess Capital Goods Scheme exposure, structure capital projects efficiently and manage existing CGS adjustment schedules. Book a consultation with our VAT team to review your position ahead of the 29 July 2026 change.