Major VAT Rule Changes: HMRC Overhauls the Capital Goods Scheme

 

1. Key Headline Changes Effective 29 July 2026

HM Revenue & Customs (HMRC) has announced crucial modifications to the Value Added Tax (VAT) Capital Goods Scheme (CGS). Designed to ease compliance for businesses, these updates significantly reshape which assets fall under complex multi-year VAT adjustment calculations.

• Higher Threshold for Property & Civil Engineering: The capital expenditure threshold for land, buildings, and civil engineering work moves from £250,000 to £600,000 (exclusive of VAT). Going forward, CGS rules will only apply to expenditure meeting or exceeding £600,000.
• Computer Equipment Removed Entirely: Computers and items of computer equipment are officially removed from the list of eligible CGS assets. Capital expenditure on IT hardware will no longer trigger CGS adjustments.
• Non-Retrospective Rules: The changes apply to expenditure incurred on or after 29 July 2026. Earlier capital expenditure and existing CGS items will remain under their original adjustment frameworks.

2. Why the Changes? Addressing Decades of Property Inflation

The primary objective behind this reform is to simplify current rules by removing cumbersome adjustment calculations that have burdened small businesses for decades. As HMRC stressed in its policy guidance:

 

Because the £250,000 threshold was established in 1990, inflation and rising commercial property values gradually dragged routine refurbishments and modest office spaces into a scheme intended for major capital projects. Raising the threshold to £600,000 realigns the CGS with modern commercial property prices, drastically reducing the number of small businesses caught in the net.

3. A Decade in the Making: Legislative Background

This overhaul is not a sudden decision; it represents the culmination of nearly ten years of tax policy review:

 

4. Practical Implications for Businesses & Tax Practitioners

What does this mean for your ongoing VAT accounting and future capital acquisitions?

• 1. Simplified IT Asset Procurement: Businesses investing in server infrastructure, enterprise hardware, or large-scale computer purchases after 29 July 2026 will no longer need to track taxable use over 5-year CGS adjustment periods. VAT recovery on computer equipment will be determined solely at the time of purchase based on standard partial exemption rules.
• 2. Property Acquisitions (£250k – £600k): Commercial refurbishments, fit-outs, or small building acquisitions between £250,000 and £599,999.99 (ex. VAT) falling on or after 29 July 2026 are excluded from CGS tracking. This represents substantial administrative savings in tracking 10-year adjustment periods.
• 3. Existing CGS Assets Remain Unchanged: Because the rules are non-retrospective, any computer equipment or property items already entered into the CGS prior to 29 July 2026 must continue to be tracked for their remaining adjustment intervals.

5. Signals of a New Tax Approach?

HMRC explicitly noted the reliance on outdated 1990 valuation baselines in its announcement. As many UK tax thresholds have remained frozen for years, this long-overdue adjustment could signal a broader, modern approach by the Treasury to uprate outdated tax bands and ease fiscal drag on growing enterprises.