VAT change: Capital Goods Scheme threshold finally increases

On 29 July 2026, the threshold for property caught by the Capital Goods Scheme (CGS) was increased to £600,000.

This will interest a wide range of businesses and their advisers, such as businesses constructing or developing property, refurbishing property, selling or buying land or property, transfers of businesses which involve land or property (TOGCs) and anyone reorganising businesses which transfer land or property.

The CGS is a mechanism for controlling how the VAT on costs is recovered. For most purchases, VAT is recovered straightaway and the business does not think any more about it. There are exceptions, one of which is a purchase caught by the CGS.

The CGS allows VAT to be recovered immediately, to the extent permitted by the usual rules, but then requires that the amount initially claimed be adjusted (up and down) each year to reflect actual use. Adjustments can be made over a period of five or 10 years, with repayments to or additional claims from HMRC each year.

Since the last millennium, the CGS has remained unchanged, capturing property, yachts, aircraft and even computers. The unchanged thresholds have become too low after several decades of price inflation, being only £250,000 for land, property, refurbishment or civil engineering, and £50,000 for everything else.

HMRC has now issued Brief 7 (2026), effective from 29 July 2026, withdrawing computers from the CGS and raising the threshold for land, property and refurbishments to £600,000. This will still capture a large number of transactions involving property.

Although it removes an awkward scheme from smaller property transactions, it also removes a useful mechanism for recovering additional VAT on purchases when the use of a property changes.

There are administrative points that businesses should consider, such as what will happen to purchases that entered the CGS before 29 July 2026 but no longer qualify for the CGS. The answer is that they will continue under their existing five or 10-year scheme.