HMRC raises Capital Goods Scheme threshold and removes computers

HMRC has confirmed significant changes to the Capital Goods Scheme (CGS), with new rules taking effect from 29 July 2026.

For businesses investing in property, refurbishment and development projects involving land and buildings, the changes could mean fewer assets falling within the scope of the CGS, less ongoing VAT monitoring and fewer long-term VAT adjustments altogether.

However, while the reforms are welcome, understanding how the changes apply to your investments and future VAT recovery remains essential.

What is the Capital Goods Scheme?

The CGS is a VAT adjustment mechanism that applies to certain high-value capital assets, governing the adjustment of input tax. It is designed to ensure that the amount of VAT recovered on qualifying assets reflects how those assets are used over time, particularly where a business makes a mixture of taxable supplies and exempt supplies.

Qualifying assets and thresholds

• Land, buildings and civil engineering works with capital expenditure of £250,000 or more (excluding VAT)
• Computers and computer equipment costing £50,000 or more for a single item (excluding VAT)
• Aircrafts, ships, boats and other vessels costing £50,000 or more

The adjustment period

The CGS monitors the use of the asset over a set number of years, known as intervals.

Where an asset falls within the scheme, businesses may be required to make annual VAT adjustments if the use of that asset changes during the adjustment period:

• 10 intervals (10 years) for land, buildings and civil engineering works
• 5 Intervals (5 years) for computer assets, aircraft, ships and boats

The first interval begins on the date the asset is occupied or brought into use. Subsequent intervals align with the business’s tax year.

What is changing from 29 July 2026?

HMRC's reform introduces two key changes:

1. The property threshold is increasing

The CGS threshold for land, buildings and civil engineering works will increase from £250,000 to £600,000 (excluding VAT). This means the scheme will only apply where qualifying capital expenditure on these assets exceeds the new £600,000 threshold.

2. Computers will be removed from the scheme

Computers and computer equipment will be removed from the list of assets covered by the CGS entirely. Businesses will no longer need to monitor or make CGS adjustments for qualifying IT assets.

According to HMRC, the computer category has become largely redundant because the value of individual computer assets has reduced significantly since the scheme was originally introduced.

Why is HMRC making these changes?

The Government's objective is to simplify VAT administration and reduce the compliance burden on businesses. HMRC noted that the £250,000 property threshold has remained unchanged since the scheme was introduced in 1990, despite significant increases in property values. As a result, more relatively modest property purchases and refurbishment projects have been captured by the scheme over time.

By increasing the threshold to £600,000, many smaller and medium-sized projects will no longer require complex CGS calculations, annual reviews or lengthy record-keeping requirements.

Which businesses will be impacted?

The changes will primarily affect VAT-registered businesses that incur VAT on capital expenditure, particularly those involved in:

• Commercial property ownership
• Property development and construction
• Real estate investment
• Education providers
• Healthcare organisations
• Charities and not-for-profit entities
• Financial services businesses
• Businesses with partial exemption or mixed-use activities

These sectors often face complex VAT recovery calculations because they make both taxable and exempt supplies. The CGS plays an important role in ensuring VAT recovery remains accurate over time.

Preparing for the changes

Although the changes are intended to simplify compliance, businesses should not assume that all VAT risks disappear.

Before the changes take effect from 29 July 2026, organisations should:

Review planned capital projects

Timing may become important for businesses considering property acquisitions or refurbishment projects near the £600,000 threshold. Understanding when expenditure is incurred and how transitional provisions apply could be critical. HMRC has confirmed that transitional arrangements will determine whether the old or new rules apply.

Identify existing CGS assets

Businesses should continue to monitor assets already within the scheme. Existing CGS obligations will not automatically disappear because the rules have changed. We are waiting to hear more information from HMRC on how these changes will impact existing CGS projects.

Assess VAT recovery positions

Partially exempt businesses, developers, landlords and organisations making mixed supplies should review whether the changes alter their VAT recovery calculations or future compliance requirements.

Strengthen documentation and record-keeping

Maintaining robust VAT records remains essential, particularly for property transactions where HMRC scrutiny remains high.

We’re here to help

Azets' VAT specialists can help you assess the impact of the changes, review existing obligations, identify recovery opportunities and ensure ongoing compliance. Whether you're planning a property transaction, refurbishment project or reviewing your VAT position, we can provide tailored advice to help you navigate the changes with confidence.

Contact our team today to discuss how the reforms could affect your business.