The Capital Goods Scheme July 2026 update introduces important changes for VAT-registered businesses that invest in high-value assets. From 29 July 2026, HMRC will simplify the scheme by removing computers from the scheme and increasing the qualifying threshold for land, buildings and civil engineering works.

For many small businesses, contractors, and self-employed individuals, the change may reduce VAT administration. However, companies involved in property development, commercial premises, construction projects, or major capital investments should review their VAT treatment carefully.

Understanding how the new rules work can help businesses avoid incorrect VAT claims and improve future tax planning.

Key Takeaways

  • From 29 July 2026, computers and computer equipment will leave the Capital Goods Scheme, reducing long-term VAT adjustment requirements.
  • The property threshold rises from £250,000 to £600,000, excluding VAT, removing many smaller projects from CGS obligations.
  • Existing CGS assets generally remain subject to the rules applying when the relevant expenditure was incurred before the changes.
  • Property businesses, landlords, contractors, limited companies, and partially exempt organisations may benefit from simpler VAT administration.
  • Businesses planning major investments should review expenditure timing, VAT recovery and transitional rules before committing to significant capital projects.

What Is the Capital Goods Scheme?

The Capital Goods Scheme is a VAT mechanism that adjusts input tax recovery on capital expenditure over a defined period, known as an “adjustment period”. Rather than reclaiming VAT in full when you purchase a capital asset, the scheme requires you to monitor the asset’s use over several years and make annual adjustments if the proportion of taxable supplies changes.

The CGS adjusts input tax recovery on certain capital assets over time. Instead of reclaiming VAT in full at the point of purchase, businesses must review the asset’s use each year over a five- or ten-year period.

How the Scheme Currently Works

When you buy a capital asset covered by the scheme, your initial VAT recovery depends on your partial exemption recovery percentage in the first year. This percentage reflects how much of your business involves taxable supplies versus exempt supplies.

If taxable use increases during the adjustment period, additional VAT on the initial capital expenditure can be recovered from HMRC. Similarly, if taxable use decreases during the adjustment period, some of the VAT previously recovered must be repaid to HMRC.

For example, a property valued at £400,000 plus £80,000 VAT might initially have 60% recovery (£48,000). If your taxable use drops to 50% in year two, you’ll owe back part of that VAT. This adjustment obligation continues throughout the entire adjustment period.

Current Assets Covered

The scheme currently applies to two main categories:

• Land, buildings, and civil engineering works if capital expenditure exceeds £250,000 (excluding VAT) with a 10-year adjustment period
• Computers and computer equipment if capital expenditure exceeds £50,000 (excluding VAT) with a 5-year adjustment period

What’s Changing on 29 July 2026?

The government announced these reforms to simplify VAT administration and reduce compliance costs. Two major changes take effect from 29 July 2026.

Change One: Computers Removed Completely

From 29 July 2026, new qualifying expenditure on computer equipment will no longer be subject to these ongoing adjustment rules. This is a complete removal of computers and computer equipment from the scheme’s scope.

This change offers significant relief for businesses in the IT, digital, and tech sectors. Previously, purchasing computer equipment worth £50,000 or more meant you had to track that asset’s use for five years. Any change in business model or use pattern requires VAT adjustments. These monitoring obligations now disappear.

For existing assets acquired before 29 July 2026 that are still within their adjustment period, the old rules continue to apply. You don’t need to retroactively recalculate.

Change Two: Property Threshold Rises to £600,000

From 29 July 2026, the property 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.

This is a substantial increase from the £250,000 threshold that has remained unchanged since 1990. The change means many mid-market property projects now fall outside the scheme entirely.

Why Does This Matter?

Projects worth between £250,000 and £600,000 (excluding VAT) no longer trigger the Capital Goods Scheme. This includes:

• Small office renovations and refurbishments
• Retail fit-outs and shop conversions
• Warehouse improvements and extensions
• Light industrial property upgrades
• Landlord property improvements

These projects can now be treated like any other business expenditure. You recover VAT in full on your return, without any ongoing monitoring obligations.

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Who Is Affected by These Changes?

The impact of the July 2026 changes depends on the type of asset, the amount of qualifying expenditure, and when the business incurred the expenditure. 

Businesses That Will Benefit Most

• Property developers and construction businesses will see reduced compliance burdens on smaller projects. A £500,000 renovation now requires no annual CGS adjustments.
• Tech companies and digital businesses will eliminate the administrative headache of tracking computer equipment. Companies purchasing servers, workstations, and software infrastructure will enjoy immediate full VAT recovery.
• Landlords and property investors with buildings let to tenants often benefit from the higher threshold. Mixed-use properties with some taxable and some exempt supplies previously required complex CGS calculations. Many now fall outside the scheme.
• Limited companies undertaking office fit-outs or building improvements will face simplified VAT recovery.
• Contractors and sole traders in construction and property services will spend less time on record-keeping for smaller projects.

Projects Grandfathered Under Old Rules

Projects where relevant capital expenditure has already been incurred before 29 July 2026 will continue to be subject to the existing CGS rules, including the old £250,000 threshold.

If you started a project before 29 July 2026 that cost more than £250,000, the old rules continue to apply even if the project completes after 29 July. The key date is when expenditure is incurred, not when completion is.

What You Should Do Now

Audit Your Current Position

Review any capital assets purchased in the last decade, particularly:

• Office and commercial property acquisitions
• Computer equipment and IT infrastructure
• Factory, warehouse, or manufacturing buildings
• Any construction, extension, or refurbishment project

Identify which assets are currently within their adjustment period (10 years for property, 5 years for computers).

Check Your Adjustment Period Dates

For properties acquired between 2016 and 2026, the adjustment period is typically 10 years from first use. For computer equipment, it’s 5 years from first use.

Understand when each adjustment period ends. Once it finishes, you no longer need to monitor or report CGS adjustments.

Plan Future Investments

If you’re planning capital expenditure between now and 29 July 2026, consider whether timing offers VAT advantages. Projects under £250,000 incurred before 29 July avoid CGS in any case.

For projects between £250,000 and £600,000, the timing of expenditure incurrence matters significantly.

Communicate with Your Accountant

Tax practitioners may find that the removal of computer equipment from the Capital Goods Scheme complicates the tracking of input tax for assets currently within their adjustment periods.

Your accountant needs to understand the new rules and how they apply to your specific circumstances. If you work with a VAT specialist, ensure they’re updating their guidance on the 29 July changes.

 

Partially Exempt Businesses: Special Considerations

The Capital Goods Scheme applies most directly to partially exempt businesses. These are organisations like:

• Property companies that let premises to exempt tenants
• Professional service firms with mixed taxable and exempt income
• Charities and social enterprises receiving both taxable and exempt grants
• Financial institutions with exempt financial services

For these businesses, the higher property threshold is particularly welcome. The threshold increase to £600,000 means fewer mid-sized capital projects will be caught in the administrative burden of CGS adjustments, providing welcome relief for businesses investing in their physical infrastructure.

If you’re partially exempt, your partial exemption recovery method directly affects CGS calculations. The July 2026 changes simplify this connection by removing lower-value assets entirely.

Practical Examples

Example 1: Retail Property Fit-Out

A business acquires a retail property and invests £400,000 in fit-out, fixtures, and refurbishment (excluding VAT). This work was completed in August 2026.

Before 29 July 2026: The £400,000 expenditure triggers CGS with a 10-year adjustment period. The business must monitor taxable use annually.

From 29 July 2026: The same expenditure does not trigger CGS at all. VAT recovery is treated like any other business expense. No annual adjustments needed.

Saving: Approximately 10 years of record-keeping and annual compliance.

Example 2: Server and IT Equipment

A tech startup purchases £65,000 of server equipment and workstations in September 2026 (excluding VAT).

Before 29 July 2026: This would be subject to CGS with a 5-year adjustment period.

From 29 July 2026: No CGS applies. The business recovers all VAT immediately and never needs to revisit the calculation.

Saving: Five years of potential VAT adjustments if the business model changes.

Example 3: Office Building Acquisition

A limited company acquires an office building for £700,000 (excluding VAT) in October 2026.

From 29 July 2026: The entire amount is subject to CGS because expenditure exceeds £600,000. The adjustment period is 10 years.

If the same property cost £550,000, no CGS applies at all.

Conclusion

If your business currently operates within a CGS adjustment period or is planning capital expenditure, start reviewing your position now. Understand which assets are grandfathered under the old rules and when your existing adjustment periods end.

The July 2026 changes won’t revolutionise your tax position overnight. However, they remove a genuine source of administrative burden for thousands of UK businesses. Take advantage of the simplified rules going forward by understanding exactly which projects they apply to.

Your accountant can help interpret these changes in your specific circumstances and ensure your business captures all available VAT relief from 29 July 2026 onwards. If you need clarity on how these changes affect your VAT recovery and capital expenditure strategy, get in touch for professional guidance.

Sources & References

Frequently Asked Question

Can I register for MTD voluntarily?
Yes. Voluntary registration is allowed before you are required to join. Many businesses opt in early to get comfortable with digital record-keeping and quarterly submissions. It also helps test software and processes in advance, reducing pressure when MTD becomes mandatory for their income level.
Do I still need an accountant for MTD?
You do not legally need an accountant, but many businesses still use one. MTD software handles reporting, but accountants help with tax planning, adjustments, and ensuring accuracy. They also reduce errors, identify allowable reliefs, and provide support with HMRC queries or more complex financial situations.
When should I register for MTD?
You should register once you are within scope and fully prepared with compatible software and digital records. Registering early is often beneficial, as it allows time to adapt to quarterly reporting. Waiting until the deadline increases the risk of errors and system setup issues.
How much will MTD cost me?
Costs vary depending on software and business complexity. Basic tools can be free or low cost, while full accounting platforms typically range from £10 to £40 per month. Additional costs may come from bookkeeping support or accountant services, depending on how much assistance you need.
Do limited companies need MTD for Income Tax?
No, MTD for Income Tax currently applies to sole traders and landlords only. Limited companies are not yet included in this part of the rollout. However, they may still be subject to MTD for VAT if registered, and future changes could extend requirements further.
Does PAYE income count towards the threshold?
No, PAYE employment income is excluded when calculating qualifying income. Only self-employment and UK property income are included. This means your salary from an employer does not affect whether you meet the MTD threshold, even if it forms your main source of income.