Capital Goods Scheme simplification

The Capital Goods Schemes (CGS) rules are being simplified with effect from 29 July 2026. The Value Added Tax (Amendment) Regulations 2026 (SI 2026/765) will remove computer equipment from the scope of the rules and increase the capital expenditure necessary in relation to land, buildings and civil engineering works to £600,000 before they are brought within the scope of the rules.

Background

The CGS is a mechanism that requires businesses to adjust their initial VAT recovery on certain high-value capital assets over a set adjustment period, to reflect changes in the extent to which those assets are used for taxable (as opposed to exempt or non-business) purposes. In particular, it currently applies to land and buildings with a VAT-exclusive value of £250,000 or more (adjusted over a 10-year period) and computer equipment with a value of £50,000 or more (adjusted over a 5-year period). The scheme is intended to ensure that VAT recovery over the life of a significant capital asset accurately tracks its economic use, rather than being fixed at the point of purchase.

As part of the Spring Tax Update in 2025, the government announced plans to simplify the CGS rules by removing computers from the assets covered by the scheme and increasing the capital expenditure value of land, buildings and civil engineering work to £600,000 (exclusive of VAT). The purpose was to reduce the number of capital assets that fall within the CGS, therefore reducing the administrative burden on small businesses.

VAT (Amendment) Regulations 2026

The VAT (Amendment) Regulations 2026 have now been passed and introduce these changes with effect from 29 July 2026.

Guidance provided by HMRC with the SI notes that property values have significantly increased since the original £250,000 threshold was put in place in 1990. Moreover, HMRC regard the computer and computer equipment has having become redundant as the threshold is very rarely triggered as the value of a single computer has decreased considerably since the scheme was introduced.

The measure will be broadly welcomed as having a significant impact on reducing the administrative burden of operating the CGS by removing computer equipment from the CGS and raising the threshold for when the CGS will apply to land, buildings and civil engineering works.

The changes apply only to assets (both property and computer equipment) where no capital expenditure has been incurred before 29 July 2026. Where expenditure is incurred before that date, the existing CGS rules continue to apply to those property and computer assets, so businesses should check whether the revised thresholds apply to new projects and review existing CGS assets and ongoing projects to determine whether the transitional provisions apply.