Helping you prosper
HMRC recently announced significant simplifications to the Capital Goods Scheme (CGS). This will reduce administrative burdens for many VAT-registered businesses, and the changes are particularly welcome for smaller businesses historically caught by the CGS when purchasing or refurbishing property.
What is changing?
From 29 July 2026, two major changes will take effect:
- computers and computer equipment will be removed entirely from the Capital Goods Scheme
- the expenditure threshold for land, buildings and civil engineering works will increase from £250,000 to £600,000 (exclusive of VAT).
Therefore, the CGS will only apply to property-related capital expenditure where the qualifying cost is £600,000 or more (exclusive of VAT).
Why have HMRC made these changes?
The CGS threshold for property related expenditure has remained unchanged since its introduction in 1990, despite substantial increases in property values, so an increasing number of relatively modest property acquisitions and refurbishments have been subject to the complex adjustment requirements of the scheme. HMRC's changes are therefore intended to simplify VAT administration and reduce VAT compliance costs for businesses.
HMRC also concluded that the computer category had become largely redundant, as the £50,000 threshold is rarely triggered in today's technology market.
A quick refresher: what is the Capital Goods Scheme?
The CGS requires businesses to monitor how certain capital assets are used over a number of years (typically five years for certain computer costs and ten years for property related expenditure) and to adjust VAT recovery annually if the taxable use of those assets’ changes over the relevant CGS period.
For example, where a property is initially used for fully taxable activities but is later partly used for exempt activities, businesses may be required to repay some of the VAT originally recovered. Or additional VAT recovery may be available if taxable use increases during the monitoring period.
The CGS can therefore involve annual monitoring, complex adjustment calculations, detailed record-keeping and long-term compliance obligations.
What are the practical benefits of the change for businesses?
Fewer properties will now fall within the CGS
The increase in the threshold from £250,000 to £600,000 means many smaller property purchases and refurbishments will not require CGS monitoring.
For example, if a business incurs £450,000 on the refurbishment of its premises in August 2026, then although under the old rules, the expenditure would have fallen within the CGS, the new rules mean that as the expenditure is below the £600,000 threshold, it will not be subject to CGS adjustments (so removing up to ten years of annual adjustment calculations and record-keeping).
Greater certainty over VAT recovery
Businesses with projects below £600,000 will determine VAT recovery under the normal VAT rules when those costs are incurred, without the need for future CGS adjustments.
For example, if a business buys a small office building for £500,000 plus VAT, then under the new rules, the CGS will not apply (previously, use of the asset would have required monitoring over a 10-year period). This means less risk of future VAT adjustments and easier business forecasting.
Removal of CGS tracking for computer assets
Businesses will no longer need to consider computers and computer equipment when determining if an asset falls within the CGS.
For example, if a technology business undertakes a large IT infrastructure upgrade costing £100,000, provided any qualifying expenditure is incurred after 29 July 2026, computer assets will be completely excluded from the CGS. Before 29 July 2026, the cost could potentially have fallen within the CGS rules. This means simpler VAT administration and no need for long-term CGS monitoring of IT investments.
Important transitional rules
These CGS changes are not retrospective.
If capital expenditure was already incurred before 29 July 2026, the existing CGS rules will continue to apply to that expenditure. Therefore, assets already within the CGS will remain within the scheme for the remainder of their existing adjustment period.
The new CGS rules will only apply where no relevant capital expenditure on the asset was incurred before 29 July 2026.
For example, if a business began a property refurbishment in May 2026 and incurred qualifying costs before 29 July 2026, the project may still remain subject to the existing CGS rules even if the total expenditure ultimately exceeds £250,000 but remains below £600,000, given that expenditure was incurred before the effective date of the CGS changes.
Practical considerations for businesses
Given these significant changes, businesses planning significant capital expenditure should:
- review any new development or refurbishment projects expected to begin in July 2026 and onwards
- consider whether expenditure will fall above or below the new £600,000 threshold and precisely when expenditure was or will be first incurred
- identify existing CGS assets that will remain subject to ongoing CGS adjustment requirements
- update internal VAT procedures and fixed asset registers
- ensure finance teams understand that the changes do not automatically remove existing CGS obligations, which need to continue to be monitored alongside new assets which fall outside of the CGS going forward.
Our comments and next steps
This is one of the most significant CGS simplifications in recent years. For many owner-managed businesses, property investors, healthcare providers, charities and professional practices, the increase in the CGS threshold should substantially reduce VAT compliance costs and administrative effort related to capital expenditure incurred from 29 July 2026 onwards. The removal of computer equipment from the scheme is also a sensible modernisation, reflecting how technology investments are made today.
Although many new smaller acquisitions and refurbishment projects that would have previously triggered up to ten years of monitoring will now fall outside the regime entirely, providing welcome simplification and greater certainty over VAT recovery, administrative requirements will not disappear. Any existing CGS items as well as any new large property developments (over £600,000 exclusive of VAT) will remain within the CGS for the relevant periods and will require simultaneous monitoring.
There will also be other wider implications. For example, it may be necessary for partially exempt organisations to check if their partial exemption methods require any changes. Also, if property related capital expenditure falls outside of CGS altogether, this may mean that the conditions for disapplying an option to tax in certain situations are not met.
The impact of the CGS changes upon each business and whether this is beneficial will depend on the particular VAT profile and nature of activities in each case. For example, if a business which is currently heavily VAT exempt (so unable to recover much of the VAT it incurs on costs) intends to make more taxable supplies going forward and incurs capital expenditure of less than £600,000 (exclusive of VAT) after 29 July 2026, the business will no longer benefit from additional future VAT recovery that would have previously been available via CGS adjustments.
It is therefore important that if you are planning development, refurbishment or other property related projects (such as acquisitions), that you review and assess the impact of the CGS changes on your VAT position at an early stage to ensure costs are managed and budgeted for efficiently.
How we can help
If you would like further guidance on the above or if you would like to discuss in relation to your own business circumstances, please contact Lisa Burnside or your usual UHY VAT adviser.
