VAT Capital Goods Scheme Changes from 29 July 2026

From 29 July 2026, HMRC has introduced changes to the VAT Capital Goods Scheme (CGS) that will reduce the administrative burden for many businesses investing in commercial property.

The CGS looks at the use of relevant property assets over a 10 year period and adjusts the VAT initially incurred depending on any change in use of those assets. For example, if the assets are used for mainly exempt purposes but after 5 years there is a change of use and so are used for mainly taxable purposes then the CGS adjustment will allow for further VAT recovery in the latter part of the 10 year period.

The reforms increase the qualifying expenditure threshold for land, buildings and civil engineering works and remove computers and computer equipment from the scheme. As a result, fewer businesses will need to carry out the ongoing VAT adjustment calculations required under the CGS.

At a Glance

• The qualifying expenditure threshold for land, buildings and civil engineering works has increased from £250,000 to £600,000, excluding VAT.
• Computers and computer equipment have been removed from the Capital Goods Scheme.
• Assets that entered the scheme before 29 July 2026 remain subject to the previous rules.

Who is Likely to be Affected?

These changes are most relevant to businesses that:

• Purchase, construct or develop commercial property.
• Carry out significant refurbishments or fit-out projects.
• Incur qualifying expenditure of £600,000 or more on land, buildings or civil engineering works.
• Have partial VAT recovery.

While many smaller property projects will now fall outside the Capital Goods Scheme, businesses undertaking larger investments should continue to consider whether the scheme applies and seek specialist VAT advice where appropriate.

Increased Threshold for Property Projects

One of the most significant changes is the increase in the qualifying expenditure threshold for land, buildings and civil engineering works from £250,000 to £600,000, excluding VAT.

Projects with qualifying expenditure of £600,000 or more may fall within the Capital Goods Scheme, provided the expenditure is of a qualifying type. For many businesses, this means smaller commercial property purchases, refurbishments and construction projects will no longer be subject to the CGS, reducing ongoing VAT administration.

Example: A business carrying out a commercial property refurbishment costing £450,000 (excluding VAT) would previously have fallen within the Capital Goods Scheme. From 29 July 2026, that project would generally fall outside the scheme, removing the need for future CGS adjustments.

Computer Equipment No Longer Included

From 29 July 2026, computers and computer equipment are no longer included within the Capital Goods Scheme.

Businesses purchasing IT equipment will no longer need to consider the CGS rules for these assets, simplifying the VAT treatment of technology investments.

Why the Changes?

The Capital Goods Scheme was introduced in 1990, and the property expenditure threshold had remained unchanged for more than 35 years. As commercial property values have increased over time, many relatively modest projects had become caught by the scheme's detailed adjustment rules.

By increasing the threshold and removing computer equipment from the scheme, HMRC aims to reduce unnecessary administration while ensuring the CGS remains focused on larger capital investments.

Existing Projects Remain Unchanged

The revised threshold and removal of computer equipment apply to qualifying expenditure incurred on or after 29 July 2026.

Assets that entered the Capital Goods Scheme before this date will continue to be subject to the previous rules for the remainder of their adjustment period.

Businesses with projects spanning 29 July 2026 should take particular care. Depending on when qualifying expenditure is incurred, different elements of the same project may be subject to different Capital Goods Scheme rules. Businesses with phased or ongoing developments should seek advice before assuming the revised threshold applies.

What Should Businesses Do?

If you're planning a commercial property acquisition, refurbishment or development, now is a good time to review whether the revised threshold changes the VAT treatment of your expenditure.

Although many projects will now fall outside the Capital Goods Scheme, larger investments will still require careful VAT planning to maximise VAT recovery and ensure ongoing compliance with HMRC's requirements.

How We Can Help

Understanding the VAT implications of capital expenditure can be complex, particularly where property transactions are involved.

Our VAT specialists can help you determine whether your project falls within the revised rules, identify opportunities to maximise VAT recovery and ensure compliance with HMRC's requirements.

If you're planning a property acquisition, refurbishment or development project, please get in touch with our team at tax@teamjs.co.uk to discuss how these changes could affect your business.