Capital Goods Scheme: VAT Recovery and Clawback Explained

If you hold, refurbish or develop commercial property, or you have opted to tax, this article explains what actually changes, whether your assets are still caught, and where the real VAT risk now sits. It does not cover residential letting where no VAT is recovered, or the general partial exemption calculation, which are separate topics.

The CGS changes are made by the Value Added Tax (Amendment) Regulations 2026, SI 2026/765 and are in force from 29 July 2026.

Two things move, and one thing that many people expected to move does not.

• The property threshold rises to £600,000. 
  Capital expenditure on land, buildings and civil engineering works is now caught only where it reaches £600,000 excluding VAT, up from £250,000. That £250,000 figure had stood since 1990.

• Computers leave the scheme.
  A single computer costing £50,000 or more used to be a capital item in its own right, tracked over five years. From 29 July 2026, that no longer applies to new expenditure.

There is a common misconception that aircraft, ships, boats and other vessels left the scheme alongside computers and computer equipment. They did not. Their treatment remains unchanged; they remain capital items at £50,000 or more excluding VAT, on the same five year adjustment period as before.

The Capital Goods Scheme spreads the VAT recovery on a long life asset across an adjustment period, so recovery tracks the way you actually use the asset. Land, buildings and civil engineering works run over ten intervals,  and ships and aircraft over five. For expenditure from 29 July 2026, computers no longer fall within the scheme. Before then, they ran over five intervals, the same as ships and aircraft.

Note that those intervals are not years. The first runs only from first use to the day before the start of your next partial exemption tax year, so ten intervals usually cover a little over nine years, not ten. Nor is ten fixed: the count reduces where your interest has fewer complete years left to run, down to a floor of three, and an interest shorter than three intervals falls outside the scheme. 

You recover VAT up front based on intended use, then adjust it up or down each interval as your taxable use changes. If taxable use falls, you repay a slice. If it rises, you recover a slice. The whole point is to smooth those changes across the life of the asset rather than fix recovery on day one.

The stated aim is simplification and reduced admin for smaller businesses. The £250,000 threshold had not moved since 1990, so inflation had steadily pulled more ordinary commercial property into a VAT Capital Goods Scheme designed for larger assets. The £600,000 figure was set to reflect the growth in property values since the scheme began in 1990.

Removing computers reflects the reality that a single computer costing £50,000 or more is now rare, so the category created tracking work for very little revenue effect. HMRC has framed the package as support for small businesses and a cut in the compliance burden, with its estimate that around 105,000 commercial properties fall out of scope.

For most landlords the honest answer after 29 July 2026 is no. Raising the threshold to £600,000 takes a large slice of commercial property out of the CGS. HMRC estimates the change removes around 105,000 commercial properties from its scope, although that is an estimate rather than a hard count.

Whether your asset is still caught turns on two questions: does the expenditure reach £600,000 excluding VAT, and did that expenditure actually bear VAT at the standard or reduced rate.

What Counts Towards the £600,000  Threshold

The CGS threshold is not just the purchase price of a building. It is the total VAT bearing capital expenditure on the asset, and it can be built up from several sources:

• The purchase of a taxable interest in land or a building, where the supply to you carried VAT at the standard or reduced rate. A zero rated or exempt supply does not count.
• Expenditure on constructing a building or a civil engineering work.
• Capitalised refurbishment and fit out of a building or civil engineering work.
• Alterations, extensions and annexes.

For associated fees, such as legal and estate agency costs, the treatment depends on the context they were incurred in. If they relate to buying an interest in land or a building, they are excluded. The same costs, however, sit inside the value when they are incurred on a refurbishment.

So a landlord incurring £520,000 on a taxable refurbishment of an opted unit stays below the new threshold, as long as those associated fees are already within the £520,000 and do not push the refurbishment to £600,000 or more. Remember that the same spend would have been firmly inside the Capital Goods Scheme before 29 July 2026, when the threshold was £250,000.

Why Most Residential Landlords Were Never Affected by the Scheme

The VAT Capital Goods Scheme has always been most relevant to commercial property, to landlords who have opted to tax, and to partly exempt businesses holding mixed portfolios. If you fall into one of those categories, the question that matters is not the admin saving but what leaving the scheme does to your exposure on a later change of use, which the next section addresses.

Here is the point that is most often stated the wrong way round. The popular version is that VAT once spread over ten years will now be repaid in one hit because the asset has left the VAT Capital Goods Scheme. That is not how it works, and getting it wrong can cost a landlord real money in planning decisions.

The key line is whether the asset has been used yet.

Before First Use: Clawback Applies Either Way

If your intention changes before the asset is first used, for example, you recover VAT on an opted commercial refurbishment intended for taxable letting and then decide to let it exempt, the recovery is repaid under regulations 108 of the VAT Regulations 1995. This is a single repayment in one return. It can be triggered within six years of the accounting period in which the input tax was attributed. 

Crucially, this clawback applies whether or not the asset is a capital item. The scheme only starts running from first use, so a change of plan before first use was always dealt with by clawback. The 2026 reform does not create this risk. It was already there.

After First Use: Only The VAT Capital Gains Scheme Adjusts A Later Change Of Use

So leaving the CGS usually reduces clawback exposure on later changes. It does not convert a spread into a lump sum. The genuine downside is the mirror image: you also lose the right to recover more VAT if your taxable use later rises. The scheme cuts both ways, and the reform removes both edges.

These figures are illustrative. The correct VAT position depends on your specific facts.

For most landlords the CGS change is a genuine improvement, but it is not universally good, and which way it falls for you depends mainly on the direction your taxable use is likely to move.

The same features cut the other way for a landlord whose taxable use is likely to rise. The VAT Capital Goods Scheme was the only route to recovering more VAT as taxable use increased, and leaving it closes that door. That trade off is set out in the clawback section above.

The reform is being presented as simplification, and for many landlords it is. The useful question is narrower than that headline. It is whether the specific asset you are recovering VAT on is still within the Capital Goods Scheme, and what that means for a change of use you can already see coming.

That is a fact specific judgment. The timing of a change of intention decides the size of any repayment, and a wrong call on a marginal asset can mean either an avoidable clawback or a recovery you never claim. If you are recovering VAT on commercial property, refurbishing an opted building, or unsure whether an asset reaches £600,000, a written VAT position before you commit is the safer course.

This article is for general information only and does not constitute tax advice. Your circumstances may alter the outcome. Speak to a qualified adviser before acting.