Following a lengthy wait, HMRC has confirmed that changes to the Capital Goods Scheme (CGS) will take effect from 29 July 2026. The reforms are designed to simplify VAT administration and reduce compliance obligations for many businesses.
A significant change is the removal of computers and computer equipment from the Capital Goods Scheme.
Under the current rules, qualifying computer purchases can require businesses to monitor their use over several years and make annual VAT adjustments if that use changes. From 29 July 2026, new qualifying expenditure on computer equipment will no longer be subject to these ongoing adjustment rules.
For many organisations, this will eliminate a time-consuming administrative process.
The reforms also increase the Capital Goods Scheme threshold for property-related expenditure.
Currently, the scheme applies where qualifying expenditure on land, buildings or civil engineering works exceeds £250,000 (excluding VAT). From 29 July 2026, this threshold will rise to £600,000 (excluding VAT).
As a result, many smaller construction, refurbishment and renovation projects will fall outside the scheme, reducing the need for long-term monitoring and annual VAT adjustments.
What does this mean for businesses?
The Capital Goods Scheme is one of the more technical areas of VAT and can create a considerable administrative burden, particularly for businesses that only occasionally undertake major property projects.
Where the scheme applies, businesses may need to review their VAT recovery each year for up to ten years if the property’s use changes between taxable and exempt activities.
With the higher threshold, many projects will no longer be caught by these rules, making VAT compliance simpler and reducing ongoing administration.
These reforms are a welcome modernisation of the Capital Goods Scheme. The previous property threshold had remained unchanged for many years, despite significant increases in construction costs, meaning projects that would once have been considered substantial were increasingly being brought within the regime.
While the changes will benefit many businesses, the Capital Goods Scheme continues to play an important role for larger property developments and for businesses that have exempt income or partial exemption issues.
Obtaining VAT advice before a project begins remains essential this is where getting in touch with ETC Tax would be advisable.
Reviewing the VAT implications at the planning stage can help avoid unexpected adjustments and maximise the amount of VAT that can be recovered.
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