July 29, 2026
General
Jane Deeks
One of the most significant VAT changes this year is almost here.
From 29 July 2026, important changes to the Capital Goods Scheme (CGS) will come into force. While these changes may not grab national headlines, they will make a real difference to many businesses investing in commercial property.
For some, the changes will reduce administration considerably. For others, the Capital Goods Scheme will remain just as important as ever.
The key is understanding whether your project falls inside or outside the revised rules.
The Capital Goods Scheme is designed to ensure that the amount of VAT recovered on certain high-value assets reflects how those assets are actually used over time.
When a business incurs significant expenditure on a qualifying property, it will usually recover VAT based on its intended use at the time the costs are incurred.
However, the use of a property can change.
For example:
Where this happens, the Capital Goods Scheme requires businesses to review the VAT recovered each year and, where appropriate, make adjustments over a ten-year period.
The principle is straightforward.
If your taxable use increases, you may recover more VAT.
If your exempt use increases, you may have to repay some VAT to HMRC.
HMRC has confirmed that, from 29 July 2026, the expenditure threshold for land, buildings and civil engineering works will increase from £250,000 to £600,000, excluding VAT.
This is a substantial increase.
Many refurbishment projects and smaller commercial developments that currently fall within the Capital Goods Scheme will no longer be caught by the rules.
HMRC has also confirmed that computers and computer equipment will be removed from the scheme from the same date, further reducing compliance for businesses.
The original threshold has remained unchanged for many years.
During that time, construction costs have increased dramatically.
Projects that would once have been regarded as major capital investments have become relatively commonplace.
Increasing the threshold recognises this reality and should ensure that the Capital Goods Scheme focuses on genuinely significant property investments rather than capturing routine commercial projects.
The biggest winners are likely to be businesses undertaking medium-sized property projects.
For example:
Projects costing between £250,000 and £600,000 (excluding VAT) should no longer require annual Capital Goods Scheme monitoring once the new rules apply.
For many businesses, that removes ten years of record keeping and annual calculations.
Absolutely not.
Large commercial developments, office buildings, industrial units, retail premises and substantial refurbishment projects will still fall within the scheme if the qualifying expenditure exceeds the new threshold.
Where significant amounts of VAT are involved, the annual adjustment process remains an important part of VAT compliance.
The change reduces the number of projects caught by the scheme, it does not remove the scheme altogether.
The Capital Goods Scheme often becomes relevant years after a project has been completed.
A building that was originally used entirely for taxable business activities may later become partly exempt.
Perhaps part of the property is leased under different terms.
Perhaps a business diversifies into exempt activities.
Perhaps occupation changes following a restructuring.
These changes can affect the amount of VAT a business is entitled to retain.
Because the adjustment period lasts for ten years, today's decisions can continue to affect VAT returns long into the future.
Imagine a company constructs a commercial office building.
The qualifying expenditure is £1.2 million plus VAT.
At the time the building is completed, the company expects to use the entire property for taxable business activities and recovers all of the VAT incurred.
Three years later, part of the building is leased for an exempt purpose.
Without the Capital Goods Scheme, the original VAT recovery would remain unchanged.
However, because the property falls within the scheme, the business must review its VAT recovery and may be required to repay part of the VAT previously claimed.
Equally, if taxable use later increases again, further VAT may become recoverable.
The scheme works both ways.
Although the rules themselves are technical, many of the problems I encounter are surprisingly simple.
Businesses often:
Most disputes arise because the scheme has simply been forgotten.
I welcome these changes.
The previous £250,000 threshold had become increasingly unrealistic given today's construction costs.
Many perfectly ordinary commercial projects were being caught by rules that were originally intended for much larger investments.
Increasing the threshold to £600,000 should remove unnecessary administration for many businesses without undermining the purpose of the Capital Goods Scheme.
However, I would sound one note of caution.
The increase in the threshold should not encourage businesses to pay less attention to property VAT.
If anything, it makes it even more important to establish at the outset whether a project falls inside or outside the revised rules.
Getting that answer wrong can still be expensive.
If you are planning a property project, now is an excellent time to review your VAT position.
Ask yourself:
If you cannot confidently answer these questions, it is worth seeking specialist VAT advice before contracts are signed or construction begins.
The changes taking effect on 29 July 2026 represent a welcome simplification of the Capital Goods Scheme.
Many businesses will benefit from reduced compliance, but the scheme continues to play an important role for larger property investments.
As with most areas of property VAT, the greatest savings rarely come from completing the annual calculations correctly.
They come from understanding the rules before the project starts.
A little planning at the beginning can prevent a very expensive VAT problem years later.
