HMRC has announced major simplifications to the Capital Goods Scheme (CGS), which will take effect from 29th July 2026, in a recently published policy paper. While the reforms will reduce administrative burden for many organisations, they also present a clear need for businesses to review current and planned capital expenditure to ensure VAT recovery remains correct.
Our specialist VAT and Indirect Tax team outline what is changing, what remains the same and why the right timing will be critical for businesses undertaking capital projects.
Key changes to the Capital Goods Scheme
Two substantial changes are being introduced to the CGS, which will affect expenditure incurred on or after 29th July 2026. Capital expenditure on computers and computer equipment will no longer fall within the scheme, making the previous £50,000 threshold irrelevant. Additionally, the CGS threshold for land, buildings and civil engineering works will increase from £250,000 to £600,000 (exclusive of VAT). Only projects meeting or exceeding the new threshold will trigger CGS adjustments going forward.
These changes are the result of HMRC’s plans to simplify VAT administration and reduce the number of assets requiring multi-year CGS monitoring.
What will stay the same within the Capital Goods Scheme?
Existing CGS items are not affected. Any capital expenditure incurred before 29th July 2026 will continue under the current rules including:
- Computers purchased before the operative date
- Land, buildings and civil engineering works where expenditure was incurred under the £250,000 threshold
- Any CGS item already within its adjustment period
This means businesses will be running two parallel regimes for a period, one for historic CGS items and one for new expenditure falling under the simplified rules.
Why businesses should review their capital expenditure
Although the reforms should reduce complexity, they introduce timing risks to businesses with ongoing or planned capital projects. The interaction between the implementation date of the changes and the effective date of expenditure is particularly important.
Projects straddling the implementation date
For capital projects with expenditure falling both before and after 29th July, businesses may find different CGS rules apply to different phases of the same development. Early‑stage costs may be subject to the existing £250,000 threshold, while later phases could exceed the new £600,000 threshold, which would result in the project effectively sitting across two regimes.
If this applies to your business, it is important to map out staged payments, contract milestones and procurement timelines to ensure VAT recovery is calculated correctly.
VAT recovery planning for large-scale developments
For projects approaching or exceeding £600,000, businesses should revisit VAT recovery forecasts and consider whether the timing of expenditure aligns with the new threshold. Depending on when costs are incurred, accelerating or deferring certain phases may influence whether CGS applies at all and how adjustments will be calculated over the asset’s life.
If you have developments with long lead times or phrased construction schedules, reviewing your capital expenditure will be especially important.
Removal of computers from CGS
Although computers will fall outside the CGS from 29th July, any expenditure incurred before that date will continue under the existing rules, meaning historic items must still be monitored for the remainder of their adjustment period. Businesses should confirm which computer assets remain within CGS, ensure ongoing adjustments are maintained correctly and update internal capitalisation and VAT processes to reflect the removal of this category going forward.
Next steps for finance and tax teams
- Review current CGS registers to identify items that will continue under existing rules.
- Assess ongoing capital projects to determine whether expenditure will fall before or after the operative date.
- Update internal VAT processes to reflect the new £600,000 threshold.
- Communicate changes to project teams to ensure procurement and finance understand the timing implications.
- Seek specialist VAT advice where projects are complex or span multiple accounting periods.
What do the CGS changes mean for businesses?
For many businesses, particularly smaller ones, the changes will remove CGS obligations entirely. However, for others, especially those undertaking significant property or development projects, the changes introduce the need to consider strategic timing.
Understanding where your projects sit relative to the 29th July implementation date will be essential in ensuring accurate VAT recovery and avoiding unexpected adjustments.
How PKF Smith Cooper can assist your business with the Capital Goods Scheme changes
Our VAT specialists can help you assess how these changes affect both existing CGS items and any capital projects you have planned or already underway, from reviewing expenditure timing and clarifying VAT recovery implications to ensuring compliance under the current and new CGS rules. Contact us today to discuss your business needs.
