We have been waiting for the detail on the proposed simplification of the Capital Goods Scheme (CGS), following earlier indications that the rules would be changed to reduce the VAT compliance burden for businesses.
HMRC has now confirmed that, from 29 July 2026, two changes will be made. Computers and items of computer equipment will be removed from the CGS altogether, and the threshold for land, buildings and civil engineering works will increase from £250,000 to £600,000, exclusive of VAT.
What is changing?
The CGS is the mechanism that can require businesses to adjust VAT recovered on certain capital assets where the taxable or exempt use changes 5 or 10 years. It is particularly relevant for partly exempt businesses, and for businesses buying, developing or refurbishing property.
The increase in the property threshold should be helpful for many businesses. Property projects that would previously have been caught by the £250,000 threshold may now fall outside the scheme, reducing the need for ongoing CGS records and annual adjustment calculations over 10 years. The removal of computers from the scheme is also a sensible simplification, although this category has become less relevant in practice over time.
At this stage, HMRC’s announcement confirms the start date and the headline changes but does not give detailed guidance on transitional arrangements. Further guidance will be needed on points such as projects that run across 29 July 2026, phased works, deposits, contracts entered into before the change, and invoices or supplies received around the implementation date. We expect HMRC to publish more detail in due course.
Timing of the change
Key timing point: HMRC Revenue and Customs Brief 7 (2026) confirms that assets already within the CGS under the rules before 29 July 2026 will remain within the scheme until the end of their adjustment period. 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.
For projects that straddle 29 July 2026, the important question is when the relevant capital expenditure is incurred. HMRC states that where capital expenditure is incurred before 29 July 2026, the CGS threshold change will not apply to that item. In those cases, the old £250,000 threshold will still be relevant.
This means that businesses should not assume that a project completed, invoiced or first used after 29 July 2026 will automatically be tested against the new £600,000 threshold. The VAT position should be checked by reference to the timing of the relevant acquisition or works, and whether capital expenditure was incurred before 29 July 2026.
What should businesses do now?
Businesses planning capital expenditure should review upcoming projects and consider whether the revised threshold may affect the VAT position. This will be particularly important where the business is partly exempt, the property has mixed use, or the intended use of the property may change in future.
The changes are welcome, but the CGS remains a technical area of VAT, especially for property transactions and partly exempt businesses. It will still be important to manage VAT recovery carefully and to keep appropriate records where assets remain within the scheme.
How Xeinadin can help
If you are considering a property acquisition, refurbishment or development project, or would like to understand how the CGS changes could affect your VAT recovery position, please contact the Xeinadin VAT team for support.
