Capital Goods Scheme changes: A welcome simplification.

From 29 July 2026, computers have been removed from the Capital Goods Scheme (CGS), and the property expenditure threshold has been increased. While the changes are a welcome step towards simplification, do they go far enough given decades of inflation and rising property values?

HMRC announced two key changes to the CGS with effect from 29 July 2026:

• The CGS no longer applies to capital expenditure on computers and items of computer equipment

• The threshold for land, buildings and civil engineering work increased from £250k (excluding VAT) to £600k (excluding VAT). This means that from 29 July 2026, the CGS only applies to land, buildings, and civil engineering works where the capital expenditure exceeds £600k. If the taxable or exempt use of the property changes during the ten-year CGS period, the original VAT recovery position may need to be adjusted

The removal of computers and the increase in threshold value will only apply where an owner has not incurred any capital expenditure on the item in respect of supplies of goods or services received before 29 July 2026. Existing CGS assets will therefore remain subject to the current threshold and ongoing adjustment as appropriate.

The CGS was introduced in 1990 and the £250k threshold has not been changed since. The increase to £600k is therefore a relatively modest increase and not in line with calls from the property sector for a much higher increase, especially given it will unlikely be increased again for many years.

The Office of Tax Simplification had found that by 2017, a normal index-linking would have increased the threshold to c.£522k, such that the £600k increase is barely in line with inflation, and far less than property inflation over the period.

The measure is expected to have a negligible impact on the Exchequer.

The increase is generally welcome, and the changes are likely to be particularly beneficial for:

• Partially exempt businesses with property holdings.

• Businesses undertaking smaller refurbishment or capital improvement projects.

• Organisations with mixed-use property portfolios.

• Businesses that would previously have needed to track and monitor computer expenditure under the CGS.

For many businesses, the reforms should reduce the number of assets requiring ongoing monitoring and adjustment calculations.

Now that the 29 July 2026 reforms are in effect, the first expenditure rule has transitioned from a planning consideration to a focal point for VAT compliance.

Because the new £600,000 threshold applies only to assets where no capital expenditure was incurred before this date, the timing of the very first supply of goods or services will determine whether the previous or new threshold will apply. Even a minor invoice for preliminary professional fees or site preparation received on 28 July 2026 would be sufficient to include a refurbishment project valued under £600,000 within the CGS for a full ten-year adjustment period.

Beyond the transitional position, the interaction with the Option to Tax (OTT) anti-avoidance test provides a lasting benefit. By lifting the threshold, many lower/mid-market properties no longer qualify as capital goods items, reducing the risk of an OTT being disapplied under the anti-avoidance provisions.

However, for corporate transactions, these reforms necessitate a "dual-track" due diligence approach. For the next decade, M&A teams must distinguish between legacy CGS assets and new acquisitions based on the commencement date of expenditure. Failure to correctly identify which threshold applies could lead to significant valuation errors regarding future VAT liabilities or credits.

We recommend reviewing any current or planned capital projects to understand whether these changes could affect your VAT position and compliance obligations.

More details can be found here. If you would like to discuss the implications this could have for your business, do get in touch with your usual S&W contact or one of the contacts listed.

Approval code: BTSJR082643