The changes are intended to simplify VAT administration, particularly for smaller businesses making significant investments in property. However, businesses with existing assets already within the CGS will still need to comply with the previous rules until their relevant adjustment periods come to an end.
Here, our Accounts Manager, Amy Daniels, explains what the Capital Goods Scheme is, what changed in July and what businesses need to consider going forward.
What is the VAT Capital Goods Scheme?
The Capital Goods Scheme is designed to ensure that the amount of VAT recovered on certain high-value capital assets reflects how those assets are used over time.
When a business incurs VAT on a qualifying capital asset, the amount of VAT it can initially recover will depend on the extent to which the asset is used for taxable business activities.
However, the way an asset is used can change. For example, a building initially used entirely for taxable business activities might later be used partly for VAT-exempt activities.
CGS therefore requires businesses to review the use of qualifying assets during an adjustment period and, where necessary, adjust the amount of VAT previously recovered.
This can result in either additional VAT becoming recoverable or VAT having to be repaid to HMRC.
Changes to the Capital Goods Scheme from 29th July 2026
Two significant changes came into effect on 29th July 2026.
Property threshold increased from £250,000 to £600,000
Previously, the CGS applied to qualifying expenditure of £250,000 or more, excluding VAT, on land, buildings and civil engineering works.
From 29th July 2026, this threshold increased to £600,000 or more, excluding VAT.
The change can apply to qualifying expenditure on:
- acquiring an interest in land, buildings or civil engineering works
- constructing a building or civil engineering work
- alterations and extensions
- refurbishing or fitting out a building where the expenditure is capitalised for accounting purposes.
By substantially increasing the threshold, fewer property transactions and projects will fall within the CGS.
The £250,000 threshold had remained unchanged since the scheme was introduced in 1990. As property values increased, this meant that more smaller businesses were being brought within the CGS and its associated administrative requirements.
Computers have been removed from the Capital Goods Scheme
Before 29th July 2026, computers and computer equipment could fall within the CGS where capital expenditure was £50,000 or more, excluding VAT.
Computers and computer equipment acquired under the new rules are no longer covered by the scheme.
The government considers this category to have become largely redundant as the value of individual computers has fallen significantly since the CGS was introduced.
The rules relating to aircraft, ships, boats and other vessels remain unchanged.
Businesses affected by the new CGS rule
The changes are particularly relevant to VAT-registered businesses that purchase, construct, refurbish or substantially alter commercial property.
They can also be important for businesses and organisations that make a mixture of taxable and VAT-exempt supplies, or have a mixture of business and non-business activities.
For example, the rules may be particularly relevant to businesses operating in sectors such as property, financial services, healthcare and education, as well as some charities and other organisations.
Even businesses that currently make wholly taxable supplies should be aware of CGS where relevant. If the use of a qualifying asset changes during its adjustment period, a VAT adjustment may subsequently be required.
Overall, for most businesses, the changes should reduce the administrative burden associated with VAT on capital expenditure.
However, businesses should not assume that they can stop monitoring assets that were already within the scheme before the rules changed. Records relating to existing CGS assets remain important, particularly where the use of a property changes or it is subsequently sold or transferred during its adjustment period.
What happens to assets already within the Capital Goods Scheme?
An important point for businesses is that the July changes are not simply a blanket removal of existing assets from the CGS.
Where a capital item already fell within the scheme under the rules applying before 29th July 2026, it will generally remain within the CGS until its normal adjustment period ends.
Businesses must therefore continue making any required CGS adjustments for those existing items, even where the value of a property is below the new £600,000 threshold.
The timing of expenditure around 29th July is also important. HMRC has specific transitional rules determining whether the old or new treatment applies, so businesses with projects or acquisitions spanning the changeover date should check their position carefully.
Review your capital expenditure and existing CGS assets
If your business has recently acquired property, undertaken a significant refurbishment or is planning substantial capital expenditure, it is worth checking whether the new £600,000 threshold applies.
Businesses should also maintain clear records of existing CGS assets and continue to review their use throughout the applicable adjustment period. Particular care may be required where:
- expenditure was incurred both before and after 29th July 2026
- the business makes both taxable and exempt supplies
- the use of a property has changed
- a qualifying property is being sold or transferred
- significant refurbishment, alteration or extension work is being undertaken.
If you are unsure whether the Capital Goods Scheme applies to your business, or how the July 2026 changes affect existing or planned capital expenditure, please contact Amy Daniels for advice on 0161 905 1801 in our South Manchester office, or 01925 830 830 for our Warrington team.