Changes To The Capital Goods Scheme

In the last newsletter I talked about some of the potential VAT issues associated with land and property, one of which was the Capital Goods Scheme (CGS). 

As a quick reminder the CGS is a mechanism that adjusts the initial VAT reclaimed on higher value VAT bearing capital land and property expenses if the asset is sold or there is a change to business use within ten years. This can be an advantage if taxable business use increases, e.g. a property that was originally a residential let being changed to a holiday let, but if taxable business use drops some of the VAT originally reclaimed may have to be paid back to HMRC. 

At the time of writing the previous article the CGS applied to a capital asset where the VAT bearing costs were £250,000 or more (excluding VAT). It covers the purchase of land and constructing, altering or extending buildings, potentially bringing many agricultural buildings within its scope. From 29 July 2026 the limit has been increased to £600,000 (excluding VAT). 

The new limit is not retrospective so land or buildings falling within the CGS prior to the change will remain in the scheme and changes in use, or disposal, could mean VAT has to be paid or could be reclaimed from HMRC. 

Where no capital expenditure was incurred on a capital item before 29 July 2026 it is likely the new limit will apply. It is important to remember in some cases, e.g. refurbishment, HMRC say relevant capital expenditure includes professional fees such as architects, so working out if the CGS applies may not be straightforward. 

The CGS threshold has remained unchanged since the 1990s so while it may be questionable whether the change adequately reflects the increase in costs and values since that time it will mean the CGS will affect fewer assets in future. Even so the VAT implications of changing the use of, or disposing of land or buildings, should still be considered at an early stage as other issues, such as the option to tax, may be relevant.