The Capital Goods Scheme spreads VAT recovery on high-value capital assets across several years instead of settling it all at once. From 29 July 2026 it covers land, buildings and civil engineering works costing £600,000 or more excluding VAT, and ships, boats and aircraft costing £50,000 or more. Your recovery is then reviewed over 10 intervals for property, or 5 for ships and aircraft, and adjusted each year as your taxable use of the asset shifts.
What is the Capital Goods Scheme?
The Capital Goods Scheme, often shortened to the CGS, is a mechanism that stops a business claiming or losing too much VAT on a big capital asset in the year it is bought. Normally you recover input VAT once, based on how you expect to use the asset. The scheme recognises that use can change over many years, so it reviews your recovery at set intervals and adjusts it up or down. It matters most to businesses that make a mix of taxable and exempt supplies, where partial exemption already limits how much VAT they can reclaim.
Which assets does it cover now?
Only a narrow set of high-value items fall inside the scheme. From 29 July 2026 the covered categories are:
- Land, buildings and civil engineering works where the VAT-exclusive cost is £600,000 or more. This includes construction, refurbishment, extension, alteration and civil engineering, as well as buying an interest in property.
- Ships, boats and other vessels, and aircraft, where the VAT-exclusive cost is £50,000 or more.
Everyday equipment, vans, plant and machinery sit outside the scheme, however expensive. Those are handled through the normal input tax rules and, for direct tax, through capital allowances. The CGS is about a small number of long-lived, high-value assets, not your general kit.
What changed on 29 July 2026?
The scheme was simplified with effect from 29 July 2026, and two changes matter. First, the land and buildings threshold rose from £250,000 to £600,000 excluding VAT, so many mid-sized property projects that used to be caught now fall outside the scheme entirely. Second, computers and computer equipment were removed as a category, so a new server or laptop fleet no longer triggers CGS adjustments whatever it costs.
There is a transition to watch. If an asset was already inside the scheme before 29 July 2026, it stays there for the rest of its adjustment period. A computer that entered the scheme in an earlier year carries on being adjusted until its intervals run out, even though computers are no longer added going forward.
How long is the adjustment period?
The adjustment period is measured in intervals, and each interval is broadly a year. Land, buildings and civil engineering works are reviewed over 10 intervals. Ships, boats and aircraft are reviewed over 5 intervals. The first interval usually runs from when you first use the asset to the end of that partial exemption or tax year, and the remaining intervals follow your VAT year. A qualifying building can therefore sit under review for the best part of a decade, which is why the records behind it need to be kept for the whole period.
How do the annual adjustments work?
When you buy the asset you reclaim VAT based on the taxable use you expect, exactly as you would for any other purchase. That figure becomes your baseline. At the end of each later interval you work out the actual taxable use for that year, as if all the VAT had been incurred then, and compare it with the baseline.
The adjustment for the interval is the total VAT on the asset, divided by the number of intervals, multiplied by the difference between the current year’s taxable use percentage and the original baseline percentage. If your taxable use has risen you reclaim a little more; if it has fallen you repay some. You report the figure on the VAT return for the second accounting period after the interval ends, so it sits neatly alongside any partial exemption annual adjustment you already make.
When does it catch you out?
The scheme bites when the use of an asset changes after purchase. Common triggers include a property moving between taxable and exempt letting, an option to tax being made or revoked, a business starting to make exempt supplies, or a large swing in the partial exemption percentage. Selling the asset part way through the period can also force a final adjustment. Because the reviews run for years, it is easy to forget a building is still in the scheme, and a missed adjustment is exactly the sort of thing an HMRC visit picks up.
If you are planning a large property purchase, it is worth mapping the CGS position before you commit, especially if you already make some exempt supplies. Our wider accountancy and tax guide sets the scheme in context with the rest of the VAT rules.
Capital Goods Scheme adjustments are a favourite area for HMRC to test, and putting one right can mean years of records and calculations. Solar Protect tax investigation insurance covers up to £100,000 of your accountant’s fees, with no excess, so a VAT enquiry into your CGS position does not turn into an unexpected bill. You can get a quote or read more about tax investigation insurance to see how the cover works.
Reviewed by Matthew Bartlett, Director, Solar Protect. This guide is general information, not personalised tax or financial advice. Figures are correct for the 2025/26 and 2026/27 UK tax years at the time of writing.