Our dedicated Technology team can support your business locally, nationally, and internationally.
Capital Goods Scheme (CGS) is being simplified from July 2026, reducing compliance burdens while creating new VAT planning considerations.
22 July 2026
HMRC has announced reforms to the Capital Goods Scheme (CGS), effective from 29 July 2026. From that date, computers and computer equipment will be removed from the CGS, and the expenditure threshold for land, buildings and civil engineering works will increase from £250,000 to £600,000 (exclusive of VAT).
The increase in the property threshold under the CGS is long overdue. The £250,000 threshold has remained unchanged since the CGS was introduced in 1990, despite the rapid increase in construction and property costs over that period. The reform should therefore remove a number of smaller property projects from the regime and reduce administrative burdens, particularly for smaller businesses. However, because the CGS can also create future VAT recovery opportunities where asset use changes, the changes should not be viewed solely as an administrative simplification.
This simplification only applies to capital expenditure incurred on or after 29 July 2026, so existing CGS assets and expenditure incurred before that date will remain subject to the current rules. This means that for capital expenditure incurred over a period that straddles the implementation date, the current rules will continue to apply, even if the use of the capital item does not begin until after the implementation date.
For many businesses, the immediate impact of HMRC's CGS reforms will be fewer capital projects falling within its scope. Property acquisitions, office refurbishments, fit-outs, and smaller development projects that previously exceeded the £250,000 threshold may now fall outside the regime, provided qualifying expenditure remains below £600,000.
This will reduce the quantum of projects where businesses would otherwise need to:
The benefits are likely to be felt most by businesses with a mix of taxable and exempt activities, including care home operators, healthcare providers, charities, educational establishments, financial services businesses and property groups.
However, simplification does not necessarily produce a better VAT outcome in every situation. One of the CGS's key functions is to ensure that VAT recovery aligns with the actual use of an asset over time. Where a property initially used for exempt activities subsequently becomes more taxable, the CGS can generate valuable additional VAT recovery opportunities. As such, expenditure on capital items falling below the new £600,000 threshold will no longer benefit from these future adjustment mechanisms.
Many commercial landlords, property investors and developers undertake refurbishment projects that historically triggered the CGS despite relatively modest levels of expenditure. For these businesses, raising the threshold should reduce considerable ongoing administrative complexity.
That said, the changes also reinforce the importance of getting VAT decisions right from the outset. Where expenditure falls outside the CGS, there may be fewer opportunities to revisit VAT recovery should future taxable use increase. Businesses considering options to tax, mixed-use developments, or phased changes in property use should continue to seek advice at an early stage.
The reforms may also have important implications for care home operators and charities undertaking development projects. These organisations often experience changing recovery positions as activities, funding streams, and property uses evolve. Whilst compliance obligations may reduce, businesses should not assume this automatically results in a more favourable VAT outcome.
Other partially exempt businesses should also reconsider how they assess future capital projects. The reduction in CGS administration is welcome, but the focus may increasingly shift to ensuring that initial VAT recovery positions are robust, given there may be fewer future adjustment opportunities.
The changes may also have knock-on implications for other VAT provisions which interact with the CGS. Most notably, the option to tax anti-avoidance rules uses CGS status as an initial gateway condition, so increasing the property threshold may affect when those provisions are engaged. The impact should also be considered in a TOGC context, as the CGS can be relevant to how capital items transfer with a business and whether the purchaser inherits future adjustment obligations or opportunities. Similarly, for pre-registration input tax, businesses should consider whether capital expenditure incurred before VAT registration falls within the CGS, as this can affect the extent to which historic input tax is recoverable and whether subsequent adjustments may be required once the business is VAT registered.
The CGS reforms represent a sensible modernisation of a regime that has remained largely unchanged for decades. By removing largely redundant inclusion of computer equipment from the scheme and increasing the property expenditure threshold to £600,000, HMRC aims to reduce complexity and better reflect current commercial realities.
For many businesses, the changes will reduce compliance costs and administrative burdens. However, the CGS has never been solely about compliance; it can also create valuable opportunities to align VAT recovery with changing business activities over time. As a result, businesses undertaking significant capital projects should continue to assess the VAT implications carefully and seek advice where appropriate, particularly in the property, healthcare, education, charity and financial services sectors.
Planning a property acquisition, refurbishment or development project? Our VAT specialists can help you assess the impact of the Capital Goods Scheme changes and maximise your VAT recovery position.
We'll send you relevant insight, events and analysis from our technical, sector and service teams - straight to your inbox.
