VAT Capital Goods Scheme (CGS) changes from 29 July 2026

The headline news on CGS is that the threshold for land and property is increasing to £600,000 and computers are being removed from the scheme with effect from 29 July 2026. Much of the initial commentary has focused on these announcements, but for many businesses what has not changed may prove just as important.

The HMRC policy document released so far suggests that the option to tax (OTT) anti-avoidance provisions remain closely linked to land and property and continue to draw heavily on concepts within the CGS. We have not yet seen anything indicating that the rules are being extended to high-value movable assets such as boats, yachts, aircraft or helicopters, although we will be keeping a keen eye on the legislation and HMRC guidance once they are fully available.

What is the CGS?

The CGS is a VAT adjustment mechanism that applies to certain high-value capital assets, principally land and buildings costing £250,000 or more (excluding VAT).

Its purpose is to ensure that the amount of VAT recovered reflects the taxable use of the asset over time. For property, this is over a ten-year adjustment period during which businesses may be required to revisit and adjust for the VAT originally claimed if the taxable use of the asset changes.

The continuing link between Option to Tax (OTT) and CGS

An option to tax makes supplies of most commercial property subject to VAT.  However, there are anti-avoidance provisions which can disapply an OTT and make it ineffective.

One of the most interesting aspects of HMRC’s policy paper is that, despite the changes, the fundamental connection between the OTT anti-avoidance rules and the CGS appears to remain intact.

HMRC continues to view the CGS status of a property as a key indicator of when the OTT anti-avoidance rules should apply. This suggests the reforms are aimed at property-related VAT recovery risks rather than creating a broader anti-avoidance regime for high-value assets generally.

Transitional rules could be critical

Perhaps the most interesting practical issue is the apparent treatment of expenditure incurred before 29 July 2026, at which time the threshold for CGS on land and property increases to £600,000.

HMRC appear to say this increase applies only where no expenditure has been incurred on the land or property before that date. If correct, this could create an important distinction between new projects and projects already underway.

For example, a refurbishment project where a deposit or instalment payment has been paid, or where a VAT invoice has already created a tax point before 29 July 2026, may continue to fall within the existing £250,000 CGS framework, even if the works are not completed and the building is not brought into use until after that date.

This could mean that two otherwise identical projects receive different CGS treatment simply because the first amount of expenditure was incurred at different times.

Businesses currently undertaking property developments, refurbishments or major capital projects may therefore need to review carefully:

• when expenditure was first incurred

• whether a tax point on purchases has already arisen

• whether deposits have been paid

• whether VAT invoices have already been issued and

• how the transitional provisions apply to their specific circumstances.

The same principles may also apply where a deposit is paid on the purchase of a property paid before 29 July 2026 but the balance paid at a later date.  This is not completely clear in the policy paper and the new legislation, yet to be released, may tighten this point up.

Key takeaway

This is a welcome change and long overdue given that £250K is not a large amount in the property / construction sector, so will simplify VAT for many. While the changes taking effect from 29 July 2026 are significant, they appear to sit within the existing framework rather than replace it entirely.

The continued reliance on CGS concepts, the apparent focus of the policy paper on land and property rather than assets such as boats or helicopters, and the potential importance of transitional expenditure rules suggest that the practical impact will depend heavily on the detail.

As is often the case with VAT, businesses may find that understanding the interaction between the new rules and the longstanding CGS regime is just as important as understanding the headline changes themselves. We will be digging into these areas as more information becomes available and recommend businesses with upcoming land and property acquisitions and capital works speak to us ahead of 29 July 2026.