HMRC announces simplification to the VAT Capital Goods Scheme (CGS)
HMRC has announced changes to the VAT Capital Goods Scheme (CGS) that take effect from 29 July 2026. The changes are designed to reduce administrative burdens and are particularly relevant to businesses undertaking property acquisitions, developments and refurbishments.
What is the VAT Capital Goods Scheme?
The CGS is a VAT adjustment mechanism for certain high-value capital assets, generally land and buildings. Until now, it could also include computer equipment. Where an asset is subject to the CGS, the amount of VAT initially recovered is reviewed over a number of years to reflect any changes in the asset’s taxable and exempt use.
In simple terms, it treats the asset as having a lifespan of more than one year, and the CGS reflects its continuing use for VAT purposes.
The scheme is designed to ensure VAT recovery reflects the actual long-term use of a capital asset. However, the monitoring and adjustment requirements can be complex and add another layer of administration.
What is changing to the CGS?
HMRC is introducing two key simplifications:
- Computers and computer equipment will be removed from the CGS entirely.
- The CGS threshold for land, buildings and civil engineering works will increase from £250,000 to £600,000 (exclusive of VAT).
As a result, property assets will only fall within the CGS where qualifying capital expenditure is £600,000 or more. This is the first increase to the threshold since the CGS was introduced in 1990.
Impact on property acquisitions, developments and refurbishments
Many property projects that currently fall within the CGS because expenditure exceeds £250,000 will no longer be subject to the regime where total qualifying expenditure is below £600,000. This could include:
- office refurbishments;
- retail unit fit-outs;
- industrial property improvements;
- smaller development projects;
- acquisitions of lower-value commercial properties.
For these projects, businesses will generally no longer need to:
- maintain CGS records;
- track VAT recovery over the adjustment period;
- perform annual CGS calculations;
- revisit historic VAT claims when property use changes.
This should provide a meaningful reduction in compliance costs, particularly for businesses with mixed taxable and exempt activities, such as financial services, insurance, healthcare, education, property groups and charities. However, the impact is potentially not all positive, as assets with a net value of between £250,000 and £600,000 will no longer offer future opportunities to increase VAT recoveries.
Transitional point: when the new CGS rules apply
The changes are not retrospective. Assets potentially impacted by the changes will be determined by when relevant VATable expenditure is first incurred, not the date when the asset is brought into use.
Where capital expenditure has already been incurred before 29 July 2026, the existing CGS rules continue to apply.
This means businesses currently managing CGS items must continue to undertake adjustments for those existing assets, even if the expenditure would fall below the new £600,000 threshold.
Our view on the CGS changes
Although the changes can be seen as a welcome simplification, they could mean opportunities are missed to improve VAT recoveries where the future use of a CGS asset changes. For example, this may apply if a building is used for increased taxable activities in future because the owner has opted to tax.
The £250,000 threshold has remained unchanged for over 30 years and property values have increased substantially in that time. Raising the threshold to £600,000 should remove a significant number of smaller and medium-sized property projects from the regime, while retaining CGS monitoring for larger property acquisitions and projects.
What should businesses do now?
Businesses planning acquisitions, developments or refurbishment projects should review the timing and structure of expenditure. Projects with qualifying costs between £250,000 and £600,000 may no longer be subject to CGS monitoring if expenditure is first incurred on or after 29 July 2026, potentially reducing long-term VAT compliance obligations.
Moore Kingston Smith has a dedicated VAT advisory team with specialists who have extensive experience in all areas of VAT and offer practical, hands-on support to their clients. This includes advising on the VAT Capital Goods Scheme and the potential impact on your business, as well as assisting with ongoing calculations. If you’re uncertain about your VAT position, or how these changes may impact you please get in touch with our experienced team today.
