UK VAT Capital Goods Scheme Changes

13 August 2026| CATEGORIES: Capital Goods Scheme, New legislation, VAT| TAGS: Capital Goods Scheme, partial exemption, property VAT

The UK Government has introduced significant changes to the VAT Capital Goods Scheme (CGS), with effect from 29 July 2026.

The changes are intended to simplify the VAT rules and reduce the administrative burden associated with monitoring and adjusting input tax recovery on capital assets over a number of years. They are likely to be particularly welcome for partially exempt businesses and others with restricted input tax recovery.

The two principal changes are:

• computers and items of computer equipment have been removed from the CGS entirely; and
• the expenditure threshold for land, buildings and civil engineering works has increased from £250,000 to £600,000, excluding VAT.

However, the transitional rules mean that the changes do not remove the need to continue monitoring and adjusting existing CGS assets where required.

What is the Capital Goods Scheme?

The Capital Goods Scheme is designed to ensure that the amount of VAT recovered on certain high-value capital assets reflects changes in the extent to which those assets are used for taxable and exempt or non-business activities over time.

Where an asset falls within the scheme, the VAT initially recovered may need to be adjusted during subsequent adjustment periods if the use of the asset changes.

Before the recent changes, the CGS applied to:

• land, buildings and civil engineering works where capital expenditure was £250,000 or more, excluding VAT;
• individual computers and items of computer equipment where capital expenditure was £50,000 or more, excluding VAT;
• aircraft, ships, boats and other vessels where capital expenditure was £50,000 or more, excluding VAT.

The changes announced by HMRC affect the first two of these categories only.

Computers removed from the scheme

From 29 July 2026, computers and items of computer equipment are no longer capital items for CGS purposes.

The previous £50,000 threshold has therefore ceased to be relevant for expenditure to which the new rules apply.

The computer category had become largely redundant because the value of an individual computer or item of computer equipment has fallen considerably since the scheme was introduced and the £50,000 threshold was therefore rarely triggered.

For businesses that would otherwise have had to monitor qualifying computer expenditure over the CGS adjustment period, the removal of this category should provide a welcome reduction in administration.

A substantial increase in the property threshold

The more significant change for many businesses is the increase in the CGS threshold for land, buildings and civil engineering works.

The threshold has increased from £250,000 to £600,000, excluding VAT.

The previous threshold had remained unchanged since the CGS was introduced in 1990. As property values and construction costs have increased, a growing number of relatively modest property acquisitions and refurbishment projects have been brought within the scheme.

The new £600,000 threshold should therefore remove a significant number of property-related capital projects from the requirement to make CGS adjustments over the relevant adjustment period.

This may be particularly beneficial for businesses undertaking substantial refurbishments or alterations to existing premises, where the expenditure might previously have exceeded £250,000 but falls below the new £600,000 threshold.

Existing CGS assets remain within the old rules

One important point is that the changes are not retrospective.

HMRC has confirmed that where capital expenditure was incurred on the relevant asset before 29 July 2026, the new rules do not apply to that asset.

This means that:

• computers and computer equipment that were already CGS assets before 29 July 2026 remain subject to the existing adjustment rules for the remainder of their adjustment periods; and
• property-related expenditure that was incurred before 29 July 2026 may remain subject to the previous £250,000 threshold.

This could result in businesses operating two regimes for a period of time: continuing to monitor existing CGS assets under the previous rules while applying the simplified rules to qualifying new expenditure.

The transitional provisions also mean that the timing of expenditure can be important. In particular, where a property project straddles 29 July 2026, businesses should consider carefully whether capital expenditure had already been incurred before that date. HMRC’s policy paper indicates that the new rules apply only where the owner had not incurred any capital expenditure on the relevant item before 29 July 2026.

A welcome simplification – but timing still matters

Overall, the changes are a sensible and welcome simplification.

The removal of computers from the scheme reflects the reality that the existing £50,000 threshold had become increasingly irrelevant. Similarly, increasing the property threshold to £600,000 brings the CGS threshold more into line with the significant increase in property and construction costs since 1990.

These changes should reduce the number of businesses and projects subject to the long-term compliance burden associated with CGS adjustments.

However, the transitional rules should not be overlooked.

Businesses with property acquisitions, construction projects or significant refurbishments spanning the implementation date should review the timing and nature of expenditure carefully. In some cases, expenditure incurred before 29 July 2026 could mean that the asset continues to be governed by the previous rules, even though further expenditure is incurred after the new threshold has taken effect.

What should businesses do?

Businesses should consider:

• reviewing existing CGS registers to identify assets that remain subject to the old rules;
• identifying planned property, construction and refurbishment projects that may now fall below the new £600,000 threshold;
• reviewing projects that commenced around 29 July 2026 to establish when capital expenditure was first incurred;
• ensuring that accounting and VAT systems continue to make CGS adjustments for historic assets where required; and
• the potential impact of the changes on VAT forecasting where future use of an asset may change.

For businesses with significant exempt or non-business activities, the changes could substantially reduce the administrative burden associated with monitoring capital expenditure. Nevertheless, the transitional rules mean that careful analysis may still be required, particularly for projects that span the implementation date.

The changes are contained in the Value Added Tax (Amendment) Regulations 2026 (SI 2026/765). Guidance on the changes was published in Revenue and Customs Brief 7 (2026).