Imagine buying a £280,000 warehouse extension for your growing business, and then spending the next decade tracking exactly how much of that building gets used for taxable sales versus VAT-exempt activity — filing an adjustment calculation every single year, even years after the builders have left and you've forgotten the project ever happened. That's not a hypothetical. It's been standard practice for thousands of UK businesses under a VAT rule that hasn't moved its threshold since 1990.
From July 29, 2026, that changes. HMRC is simplifying the VAT Capital Goods Scheme (CGS), and the update is worth understanding even if you've never heard the term before — because if your business owns property, or has ever bought expensive equipment, you may have been closer to this rule than you realized.
What the Capital Goods Scheme Actually Does
The Capital Goods Scheme is a VAT mechanism that applies to a small set of high-value assets: land, buildings, civil engineering works, computers, aircraft, ships, and other vessels. It exists to handle a specific problem — when a business claims VAT back on a big purchase, it does so based on how the asset is used at the time of purchase. But the way an asset gets used can shift over the years that follow.
Say a business buys a building and initially uses 60% of it for taxable sales and 40% for VAT-exempt activity. It reclaims VAT proportionally. Three years later, its exempt activity has shrunk and 90% of the building is now used for taxable supplies. Without a mechanism to catch that, the original VAT recovery would be permanently out of step with reality.
The CGS is that mechanism. For each qualifying asset, HMRC sets an "adjustment period" — typically ten years for land and buildings, five years for other capital items — during which the business must monitor and, where use has meaningfully changed, adjust its VAT recovery annually. The total VAT at stake is divided evenly across the interval (on a £200,000 land and property VAT bill, for example, that's £20,000 reviewed every year for a decade), and the business either claims more back or repays some, depending on which direction taxable use has moved.
Getting this wrong is not a minor paperwork slip. Because the adjustments run for years after the original purchase, a business can end up with a surprise VAT bill — or a missed recovery opportunity — long after the transaction is out of everyone's memory. It is exactly the kind of long-tail compliance obligation that's easy to lose track of without disciplined record-keeping.
What's Changing on July 29, 2026
Two changes take effect under the Value Added Tax (Amendment) Regulations 2026:
Computers are removed from the scheme entirely. New computer equipment purchases will no longer trigger CGS monitoring or annual adjustments at all, regardless of value. HMRC's stated reasoning is straightforward: the scheme was designed when a single computer could represent a genuinely large capital outlay. Decades of falling hardware costs have made that threshold irrelevant, while the compliance burden of tracking usage for five years has stayed exactly as heavy.
The land and property threshold nearly triples. Qualifying capital expenditure on land, buildings, and civil engineering works rises from £250,000 to £600,000 (both figures exclusive of VAT). That £250,000 figure has been unchanged since the scheme was introduced in 1990 — meaning inflation and rising property and construction costs have spent thirty-plus years quietly pulling smaller and smaller projects into a compliance regime meant for major capital investments.
HMRC estimates the changes will save businesses roughly £0.6 million a year in ongoing administrative burden, with negligible impact on total VAT revenue — this is a genuine simplification measure, not a stealth tax change.
The Transitional Rule: What Counts as "Before" and "After"
The dividing line is when capital expenditure is first incurred, not when a project finishes or when an asset is put into use.
- Expenditure incurred on or after July 29, 2026 falls under the new rules: no CGS obligations for computers, and the £600,000 threshold for property.
- Expenditure incurred before July 29, 2026 stays under the old rules — including the £250,000 threshold — for the remainder of that asset's adjustment period, even if the project is still ongoing or the ten-year monitoring window extends well past 2026.
That matters for any live, multi-phase project. If a business has already incurred qualifying capital expenditure on a building before the effective date, that project remains within the scheme under the old threshold even if later phases of spending happen afterward. Businesses partway through a renovation or fit-out should check when their first qualifying spend actually landed, not just when the whole project is expected to wrap up.
Who Benefits — and Who Should Still Pay Attention
The clearest winners are smaller and mid-sized businesses undertaking property projects in the £250,000–£600,000 range: a shop fit-out, a warehouse extension, an office renovation. Many of these will now fall outside the CGS altogether, meaning no ten-year tracking obligation and no annual adjustment filing for that project.
Businesses buying computer equipment of any value get a clean exemption going forward — genuinely useful for growing companies refreshing IT infrastructure who previously had to monitor changes in how that equipment was used.
But the change isn't purely a "do nothing differently" situation for everyone:
- Projects that hover near the new £600,000 line still need advance planning. If your business expects the taxable-use proportion of a property to shift significantly in future years — for example, because you're likely to opt to tax the property later, or expect exempt activity to grow or shrink — falling outside the CGS means you lose the annual adjustment mechanism that would otherwise let you claim back more VAT if taxable use increases. That cuts both ways, so it's worth a conversation with a VAT adviser before committing to a project, not after.
- Assets already inside the scheme under the old threshold keep their existing obligations. Businesses shouldn't assume July 29 clears their compliance slate for VAT they're already tracking.
- The other CGS categories — aircraft, ships, and other vessels — are unaffected. Only computers and land/property thresholds are changing.
Why This Is a Good Prompt to Review Your Capital Asset Records
Even businesses who are relieved to drop out of the CGS should treat this as a natural checkpoint. Go through your capital asset register and ask:
- Which assets are currently inside an active CGS adjustment period, and when does each one expire?
- For property, when was expenditure first incurred — does the project fall under the old £250,000 threshold or the new £600,000 one?
- Are you actually tracking taxable-versus-exempt use accurately enough to make a correct annual adjustment, or has that tracking quietly lapsed?
This kind of long-horizon compliance tracking is exactly where informal spreadsheets tend to break down — a formula gets overwritten, a tab gets deleted, or nobody remembers which of last year's numbers were the adjusted figures versus the originals. A VAT obligation that runs for ten years needs a record system that's just as durable and auditable as the obligation itself.
Keep Your Financial Records Ready for Long-Horizon Compliance
Rules like the Capital Goods Scheme are a reminder that good bookkeeping isn't just about this quarter's numbers — some obligations span a decade, and your records need to hold up for all of it. Beancount.io provides plain-text accounting that gives you complete transparency and a version-controlled history of every entry, so a VAT adjustment schedule you set up today is still traceable and auditable years from now. Get started for free and see why developers and finance professionals are switching to plain-text accounting.