VAT: Change to the capital goods scheme

Changes taking effect from 29 July 2026 are designed to cut red tape for small businesses.

Overview

The VAT capital goods scheme (CGS) applies to a small number of high-value capital assets used in businesses which have a mix of taxable and exempt or non-business supplies. It restricts the initial VAT input claim, based on the proportion of taxable and other supplies, and adjusts the amount recovered if the proportion changes over a specified period of time (the adjustment period).

Typically, it impacts businesses that are partially exempt for VAT, and businesses using a qualifying asset partly for non-business purposes.

The assets involved are:

• land, buildings and civil engineering work
• aircraft, ships, boats or other vessels
• computers and computer equipment - until taken out of CGS by the latest changes.

The scheme does not apply if assets are only acquired to be resold.

Broadly speaking, use of these assets is monitored over the adjustment period, with the initial VAT recovery fine-tuned over this period. The adjustment period depends on the type of asset, and is usually ten years for land, buildings and civil engineering works; and five years for other items.

Yearly adjustments to input tax are made, comparing the taxable use initially put forward, with what is actually happening. Where the proportion of taxable supplies changes, the business then either reclaims more VAT, or repays VAT previously claimed.

What’s changing

• computers and computer equipment are taken out of the scheme
• the threshold for land, buildings and civil engineering works goes up from £250,000 to £600,000 (exclusive of VAT)
• rules for aircraft, ships, boats and other vessels remain the same.

What the change looks like in practice

Where capital items fell within the scheme under the thresholds applying before 29 July 2026, they remain within the scheme until the end of their normal adjustment periods. CGS adjustments must still be made, even if the first adjustment period starts on or after 29 July 2026.

The new £600,000 threshold applies to land acquired on or after 29 July 2026, and to buildings and civil engineering works acquired, constructed, refurbished, fitted out, altered or extended on or after that date.

Computers and computer equipment acquired on or after 29 July 2026 are no longer covered by the scheme, and there is no need to make CGS adjustments for them.

Here to help

VAT and simplification are not words that often go hand in hand. The latest changes are welcome, but the capital goods scheme remains complex. Compliance is demanding, and the rules come with their own pitfalls - especially, for example, where assets are disposed of. Please contact us for relevant advice.