Simplification of the capital good scheme

The government has confirmed that its previously announced changes to the capital good scheme (CGS) will take effect from 29 July.

The CGS is a VAT accounting mechanism which requires a taxpayer to monitor their taxable use of a capital asset for a period of 10 years and make adjustments where that taxable use changes (payments to HMRC where that use declines and refunds where it increases).

It has been in place for decades without an uprating in its thresholds, which had remained at £250,000 for land or property, naturally bringing a lot more property into scope of the scheme in 2026 than in 1994.

The major change announced is an increase in the threshold to £600,000 of capital spend, after which a CGS item is created. The government is also removing computer equipment from the scheme, but we expect the practical effect of that to be close to nil, certainly for registered providers.

The first clarification to make is that the increased threshold only applies to capital projects for which spend begins after 29 July 2026. For existing or in-progress capital projects, the old £250,000 threshold remains and adjustments are still required in the normal way for the life of the scheme.

As a general point, whilst land purchases and construction projects are common within the sector, it is important to note the CGS is limited to capital spend – new or refurbished head offices, not developments for sale. Similarly where construction costs are zero rated (i.e. new build residential works) they do not count towards the threshold.

The change should represent a simplification, with the removal of smaller renovations and refurbishment works likely to be welcome in particular, but it is worth noting that CGS status does have other impacts across the VAT code. For example, the rules on a disapplication of an option to tax require the property to be (or become in future) a CGS item: if that condition is not met, then an option to tax is likely to continue to apply. It is also common for partial exemption special methods to have a particular way of dealing with VAT incurred on CGS items, which may need to be reviewed. 

If you would like to discuss any aspect of the change, or CGS in general, please contact chris.x.evans@bdo.co.uk or parul.anand@bdo.co.uk