Many organisations are affected by the VAT Capital Goods Scheme (CGS) without realising it. The scheme can apply where significant VAT-bearing expenditure is incurred on land, buildings, civil engineering works and, under the rules applying before 29 July 2026, certain computer equipment.

The CGS is particularly important for businesses and organisations with a mixture of taxable, exempt or non-business activities. Where VAT is reclaimed on a capital item, but the use of that item changes during its CGS life, VAT adjustments may be required. These adjustments can result in substantial irrecoverable VAT costs.

From 29 July 2026, the CGS threshold for land, buildings and civil engineering works will increase from £250,000 excluding VAT to £600,000 excluding VAT. Computers and items of computer equipment will also be removed from the scheme. However, the changes are not retrospective, so organisations with existing CGS assets will still need to review and complete any required adjustments.

What is the VAT Capital Goods Scheme?

The Capital Goods Scheme is a mandatory VAT adjustment mechanism. It applies to certain high-value capital assets and requires the VAT originally reclaimed to be reviewed over a set adjustment period.

For land, buildings and civil engineering works, the CGS adjustment period is usually ten years. During that period, an organisation must consider whether the taxable, exempt or non-business use of the asset has changed. If it has, an annual VAT adjustment may be required.

The purpose of the scheme is to ensure that VAT recovery reflects how the asset is actually used over time, rather than only how it was intended to be used when the VAT was first claimed.

This can be particularly relevant for:

• property purchases
• construction projects
• extensions
• refurbishments
• civil engineering works
• properties used for mixed taxable and exempt activities
• properties used partly for non-business purposes

The CGS is not optional. If an asset falls within the scheme, the organisation must keep suitable records and carry out the required calculations during the adjustment period.

When does the CGS apply?

Before 29 July 2026, the CGS applies to land, buildings and civil engineering works where VAT-bearing capital expenditure is £250,000 or more excluding VAT. It can also apply to a computer or item of computer equipment where the capital expenditure is £50,000 or more excluding VAT.

From 29 July 2026, the threshold for land, buildings and civil engineering works will increase to £600,000 excluding VAT. Computers and computer equipment will no longer be covered by the scheme.

For property, the CGS can apply to the purchase, construction, extension or refurbishment of a building. It can also apply to civil engineering works. This means that an organisation does not need to be buying a large commercial property to fall within the rules. A refurbishment, fit-out or extension project can also bring a property into the CGS if the relevant threshold is met.

The rules are often most significant for organisations that have a mixture of taxable, exempt or non-business income. These organisations may not be able to recover all input VAT, and any change in use during the CGS life can create further VAT adjustments.

Why does the Capital Goods Scheme matter?

The CGS matters because a change in use can result in VAT having to be repaid to HMRC.

For example, an organisation may purchase a commercial property for £300,000 plus £60,000 VAT and recover the VAT in full because the property is initially used for taxable business purposes. If the property is sold VAT exempt in year five of its ten-year CGS life, the organisation may need to repay 50% of the VAT originally claimed. This would create a £30,000 VAT cost.

CGS adjustments can also arise where a property is not sold, but its use changes. For example, a building may initially be used for taxable business activity, but later be used partly for exempt supplies or non-business purposes. In that situation, the organisation may need to adjust the VAT it has recovered.

This is why CGS records should be maintained throughout the adjustment period. Businesses should be able to identify the original VAT claimed, the adjustment period, the use of the asset each year and any calculation made.

What is changing from 29 July 2026?

HMRC has confirmed two key changes to the Capital Goods Scheme from 29 July 2026:

• Computers and items of computer equipment will be removed from the list of assets covered by the scheme
• The expenditure threshold for land, buildings and civil engineering works will increase from £250,000 excluding VAT to £600,000 excluding VAT

This means that, from 29 July 2026, the CGS will apply to land, buildings and civil engineering works only where the relevant capital expenditure is £600,000 or more excluding VAT.

The change is intended to simplify VAT administration and reduce the number of assets caught by the scheme. The £250,000 property threshold has remained unchanged since the CGS was introduced in 1990, while property and construction costs have increased significantly. As a result, more businesses and organisations have been brought within the scheme for projects that may not have been considered high-value when the threshold was originally set.

Will existing CGS assets be removed from the scheme?

The changes will not automatically remove existing CGS assets from the scheme.

HMRC has confirmed that where an owner has incurred capital expenditure on land, buildings, civil engineering works, computers or computer equipment before 29 July 2026, the changes will not apply to that expenditure. The new threshold and the removal of computers from the scheme will only apply where no capital expenditure has been incurred on the item before 29 July 2026.

This means that if a property is already within the CGS because expenditure of £250,000 or more excluding VAT was incurred before 29 July 2026, the organisation will generally need to continue making CGS adjustments for the remainder of the adjustment period.

Businesses should not assume that the new £600,000 threshold removes historic obligations. Existing records, annual calculations and use reviews should still be maintained.

Should property expenditure be delayed until 29 July 2026?

Some organisations may want to review the timing of planned property expenditure before committing to a purchase, construction project, extension or refurbishment.

Where a business or organisation has taxable, exempt or non-business activities and expects property-related expenditure to be between £250,000 and £600,000 excluding VAT, delaying expenditure until 29 July 2026 may mean the asset does not fall within the CGS.

However, timing decisions should not be made on VAT alone. Commercial requirements, contractual deadlines, funding arrangements, construction timetables and operational needs must also be considered.

It is also important to note that costs falling below the new CGS threshold may still be affected by other VAT rules. In particular, partial exemption and non-business use rules may still restrict VAT recovery. The standard partial exemption method override may also require a use-based adjustment where the standard method does not produce a fair and reasonable result.

Before delaying or accelerating expenditure, organisations should take advice based on the specific facts, including when expenditure is incurred and how the property will be used.

What does the removal of computers from the CGS mean?

From 29 July 2026, computers and items of computer equipment will be removed from the CGS. This means that the previous £50,000 excluding VAT threshold for computer equipment will no longer apply.

This should reduce administration for businesses and organisations with significant IT expenditure. However, it does not mean VAT recovery on IT and computer equipment can be ignored.

Input VAT recovery will still need to be considered under the normal VAT rules. Where computer equipment is used for exempt or non-business activities, VAT recovery may still be restricted. Businesses should also consider whether any expenditure incurred before 29 July 2026 remains subject to existing CGS obligations.

Who is most likely to be affected?

The CGS changes are likely to be relevant to organisations that incur VAT on property projects, particularly where there is a mixture of taxable, exempt or non-business activity.

This may include:

• property investors and developers
• landlords and property owners
• charities
• education providers
• healthcare organisations
• financial services businesses
• housing associations
• businesses undertaking major refurbishments or fit-outs
• organisations carrying out civil engineering works
• businesses with significant IT or computer equipment projects

Businesses with wholly taxable activities may still need to identify CGS assets and keep appropriate records. However, the scheme is often most significant where VAT recovery may change over time because of exempt or non-business use.

What should businesses do now?

Businesses and organisations should review both existing CGS assets and planned capital expenditure.

Practical steps include:

• Identify existing CGS assets and confirm the remaining adjustment period
• Review property projects planned before and after 29 July 2026
• Check whether planned expenditure is expected to fall between £250,000 and £600,000 excluding VAT
• Consider whether the timing of expenditure affects whether the CGS applies
• Review partial exemption and non-business use
• Check whether historic CGS adjustments have been completed correctly
• Update internal VAT processes for computer equipment
• Consider whether the partial exemption method override could apply
• Seek specialist VAT advice before committing to major property expenditure

Taking these steps before contracts are signed or invoices are issued can help prevent avoidable VAT costs.

Common Capital Goods Scheme mistakes

CGS errors can be costly because they may affect VAT recovery over several years. Common mistakes include:

• failing to identify when a property enters the CGS
• not tracking the ten-year adjustment period
• ignoring changes in taxable, exempt or non-business use
• overlooking CGS implications when selling a property
• assuming the new £600,000 threshold applies retrospectively
• assuming costs below £600,000 will never require VAT adjustments
• overlooking the partial exemption method override
• treating computer equipment incorrectly after the 2026 changes
• failing to retain invoices, calculations and use records

These errors can lead to overclaimed VAT, underdeclared VAT, HMRC assessments, penalties and interest.