The capital goods scheme threshold has moved, and two figures now run side by side
On 29 July 2026 the capital goods scheme threshold for land, buildings and civil engineering works rose from £250,000 to £600,000 excluding VAT, and computers dropped out of the scheme for new expenditure. The change was made by statutory instrument rather than by a Finance Act, which is one reason it has passed a lot of people by. Almost every checklist in circulation still says £250,000, and for most properties already in the scheme that figure is still the right one.
What changed, and when
The capital goods scheme is the rule that stops a business settling its VAT position on an expensive asset once and for all in the year it buys it. Instead the recovery is revisited each year for a decade, and adjusted up or down as the proportion of the asset's use that supports taxable rather than exempt supplies moves. On 29 July 2026 the Value Added Tax (Amendment) Regulations 2026 changed which assets that applies to. The threshold for land, buildings and civil engineering works rose from GBP 250,000 to GBP 600,000, in each case excluding VAT. Computers and computer equipment ceased to be capital items, but only prospectively: the saving in those regulations is not confined to the property threshold, so a computer on which expenditure was incurred before 29 July 2026 stays in the scheme and its five year adjustment period runs to the end. The regulations were made on 7 July 2026, laid before the Commons on 8 July, and came into force on 29 July. The GBP 50,000 threshold for aircraft, ships, boats and other vessels is untouched, and so is the ten year adjustment period; nothing about how the scheme works has moved, only which assets enter it. HMRC published a brief and updated the capital goods scheme notice on the day the regulations took effect. It has not updated the option to tax notice, which still quotes the old figure.
Why GBP 250,000 is still the live figure on most properties
This is the part that produces wrong answers in both directions. The new threshold does not sweep existing items out of the scheme. The regulations provide that the change has no effect on a capital item where the owner incurred any relevant expenditure on it in respect of goods or services supplied before 29 July 2026, and HMRC has confirmed that an item already in the scheme under the old threshold stays in until the end of its adjustment period, with all the usual adjustments continuing even where the first affected year begins after the change. A property bought or refurbished for GBP 400,000 in 2023 therefore remains a capital item with several years still to run, and a business that quietly stops adjusting because it has read that the threshold is now GBP 600,000 will be wrong for the rest of the decade. Two thresholds are in operation at the same time, and will be until the middle of the 2030s. The date that decides which one applies is the date the goods or services were supplied to the owner, not the date an interval starts and not the date the property changes hands. A single qualifying supply before 29 July keeps the whole item on the old figure.
What creates a capital item, and what does not
For land on its own, the regulations count only expenditure on the acquisition. For a building or a civil engineering work they count acquisition, construction, refurbishment, fitting out, alteration and extension. There is a trap in that distinction, though it is narrower than it first appears. Spending on land that produces neither a building nor a civil engineering work, drainage or landscaping on land you already hold for instance, creates no capital item. It does not follow that money spent on bare land sits outside the scheme, because constructing a civil engineering work on bare land creates a capital item in its own right, and HMRC treats land you have bought and then built on as a single capital item, so the purchase price and the construction cost are added together and tested as one figure. Buy a site for GBP 300,000 and build for GBP 500,000 and you have an GBP 800,000 capital item, not two figures that each fall short. Reduced-rated supplies count towards the threshold; zero-rated and exempt supplies do not. Legal and estate agency fees are excluded, as are rent and service charges unless they have been paid or are payable more than twelve months in advance, or the supplier has invoiced them for a period of more than twelve months, so rent invoiced for exactly a year stays out. Phased refurbishment is where real judgement is needed, since whether the phases are added together decides whether the threshold is crossed at all. HMRC accepts that there is more than one refurbishment where there are separate contracts for each phase, or a single contract in which each phase is a separately selectable option, and each phase is completed before the next begins. Contractors working floor by floor through an occupied building is usually one refurbishment. And the threshold test runs one way only: if the expected cost is estimated above it and the item enters the scheme, it stays in even where the final spend comes in below.
How the adjustment actually works
The item is followed for ten intervals. The first runs from the day the owner first uses it, which for a building is the earlier of physically occupying it and granting a lease or licence over it, and ends on the day before the start of the owner's next VAT year. Acquisition alone does not start the clock, so a building bought and left empty begins its first interval only when it is first used. Each later interval is a year. The recovery position established at the end of that first interval becomes the baseline, and this is the point people get wrong: each later year is compared with that baseline, not with the year before it. The adjustment is the total VAT on the item, divided by the number of intervals, multiplied by the difference in percentage points between the taxable use in that year and the baseline. It goes on the return for the second VAT period after the year ends, not the first, which for a quarterly business means the quarter after next. Illustrative figures make the shape of it clearer. A company buys an opted commercial building and first uses it on 1 October 2026, paying GBP 900,000 plus VAT of GBP 180,000, and it recovers 90 per cent because that is the proportion of its use supporting taxable supplies. Its VAT year ends 31 March. GBP 900,000 is above GBP 600,000, so this is a capital item, and the slice per interval is GBP 18,000. Initial recovery is GBP 162,000. In the year to 31 March 2028 taxable use falls to 60 per cent, so the adjustment is GBP 18,000 multiplied by minus 30 percentage points, or GBP 5,400 payable to HMRC, declared on the return for the quarter ended 30 September 2028. In the following year use recovers to 95 per cent and GBP 900 comes back.
The threshold change, seen at the point it bites
Take a partly exempt business refurbishing its offices at a cost of GBP 400,000 plus VAT of GBP 80,000. If the works were supplied before 29 July 2026, the GBP 250,000 threshold applies, GBP 400,000 exceeds it, and a capital item with a ten year tail is created. If everything was supplied afterwards, the GBP 600,000 threshold applies, GBP 400,000 does not reach it, and no capital item arises at all. The GBP 80,000 is attributed once under the business's partial exemption method and the matter is closed. A difference of a few weeks is worth ten years of adjustments, and where expenditure straddles the date it is the supply dates on the invoices, not the contract date, that decide it. For most owner-managed property businesses the practical effect is that a whole band of ordinary spending, refurbishments and smaller commercial acquisitions between GBP 250,000 and GBP 600,000, now falls outside the scheme entirely. From here on this is a large-property regime, which also means the records for the items already inside it are that much easier to mislay.
Short interests, and the divisor nobody changes
Ten intervals is the standard, but where the owner's interest is shorter the period is reduced: to one more than the number of complete years the interest has to run, measured from the date of first use, subject to a floor of three intervals. A separate cut-off sits elsewhere in the regulations, under which a lease of less than thirty six months is not treated as an interest for these purposes at all. The trap here is in the arithmetic rather than the rule. Where the period is shortened, the divisor in the adjustment formula shortens with it. A business fitting out premises under a seven year lease, with GBP 140,000 of VAT to recover, has eight intervals, so the slice is GBP 17,500. Divide by ten out of habit and every adjustment for eight years is understated by GBP 3,500. On a nine year lease, by contrast, ten exceeds nine by only one, so no reduction applies and the slice is GBP 14,000. Because the test is applied at first use and measures the years the interest still has to run from that date, a fit-out beginning three months into a term does not get a full term's worth of intervals.
Selling inside the adjustment period
A sale during the adjustment period accelerates everything that is left. The year in which the sale falls is adjusted on the actual use in that year, and each remaining complete year is then treated as though the item were used entirely for taxable purposes if the sale was taxable, or entirely for exempt purposes if it was exempt. Return to the same building, sold in the year to 31 March 2030 when actual taxable use ran at 60 per cent, and suppose the sale is exempt because the option to tax has been disapplied, the buyer having certified that it intends to convert the building into dwellings. The year of sale produces GBP 5,400 payable. The six remaining years are each treated as nil per cent taxable against a 90 per cent baseline, giving GBP 16,200 each and GBP 97,200 in total. The whole GBP 102,600 falls due on a single return. It is worth knowing why the example runs through disapplication rather than revocation, because the alternative is a common mistake. An option cannot simply be switched off to produce an exempt sale. The cooling-off route lasts six months and is closed once tax has become chargeable on a supply of the land, the automatic route requires the opter to have held no interest for six continuous years, and the twenty year route carries a condition that the land must not still be a capital item subject to adjustment. An option cannot be revoked out of a live capital goods scheme item. Where a sale is taxable the acceleration runs the other way and produces a recovery, subject to a levelling rule: where the total VAT recovered over the life of the item would exceed the output tax charged on the disposal, the regulations bring the total back down to that output tax, which can require a payment rather than merely denying a deduction. HMRC has an express discretion there and says it does not apply the rule to ordinary commercial losses, to depreciation, or to items used only for taxable purposes throughout. A transfer of the business as a going concern is different again, because there is no supply at all: the buyer inherits the item and the remaining intervals and is treated as having done everything the seller did. An ordinary purchase carries nothing across. On a taxable sale the seller makes its own disposal adjustment and the buyer tests its own expenditure against the current threshold, so it is only on a going concern, or a movement within a VAT group, that a 2027 buyer can inherit an item created by expenditure in 2021 and the old GBP 250,000 test along with it.
What to do about it this month
Three things follow, and none of them takes long. Wherever the old figure is written down, in a checklist, a template or an engagement letter, replace it with both figures and the date rather than with GBP 600,000 alone, because a note saying GBP 600,000 will cause somebody to stop adjusting an item that is still in the scheme. Then list the capital items the business already has, property and computers alike, with the expenditure date, the total VAT, the number of intervals, the baseline percentage and the year end dates. Those records have to outlive the ordinary six year VAT record-keeping period, because an item created in 2025 needs adjusting into the middle of the next decade, and in practice this is where the scheme goes wrong: not in the arithmetic but in the file that no longer exists by the time the use changes. Third, if capital expenditure is in progress across 29 July 2026, establish the supply dates rather than the contract date. Two questions are worth putting to your accountant on the back of all this. Which capital items does the business currently have, and when does each one's adjustment period actually end. And is any change coming that would move the proportion of taxable use, a new exempt letting, a change in what the building is used for, or a sale, because the cost of that change is fixed by the baseline set years ago and is usually much larger than anyone expects.
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This article is general information only and does not constitute tax advice. Figures and dates are current as at the date of writing; any worked example is illustrative. Always consult a qualified adviser before acting.