VAT Capital Goods Scheme: how it works and the 2026 changes

What does the Capital Goods Scheme do

It spreads the VAT on a big capital item over an adjustment period of 5 or 10 intervals (usually years). Each year you compare your taxable use with your use in the first year. If taxable use rises, you reclaim more. If it falls, you pay some back.

Normally you reclaim input VAT (the VAT you pay on costs) once, when you buy something, based on how you expect to use it. For most purchases that is the end of it. For large items that last for years, a one-off decision can be badly wrong. A building used mostly for taxable business in year one might be used mostly for exempt activity by year five.

The scheme only matters if your business makes both taxable and exempt supplies (partial exemption), or uses an item partly for non-business purposes. A business that is fully taxable throughout will see no adjustments. Typical users are property businesses, schools, charities, care providers, financial services and housing.

What changed on 29 July 2026

From 29 July 2026, land and buildings enter the scheme only if they cost £600,000 or more, excluding VAT, up from £250,000. Computers and computer equipment left the scheme. Ships, boats, other vessels and aircraft stay at £50,000. HMRC set this out in Revenue and Customs Brief 7 (2026).

Far fewer items now fall into the scheme. A building costing £400,000 would have been a capital item before the change. Now it is not, so you reclaim the VAT once under your normal partial exemption method, with no later adjustments. The same goes for a large server purchase.

The land and buildings category covers more than straight purchases. Construction, extensions, alterations, refurbishment and fitting out can also create capital items when the spend reaches the threshold.

There was no Capital Goods Scheme change in April 2025, despite claims on some websites.

What happens to items already in the scheme

Items in the scheme before 29 July 2026 stay in until their adjustment period ends. A building bought in 2023 for £300,000 keeps its 10 intervals. A computer system bought in 2025 for £60,000 keeps its 5. Items entering on or after 29 July 2026 use the new thresholds.

You cannot drop older items early just because they would not qualify under the new thresholds.

How long is the adjustment period

Land and buildings have 10 intervals. Where the interest has less than 10 years to run when you acquire it, such as a short lease, it is 5. Vessels and aircraft have 5. An interval is normally your partial exemption year.

• Land and buildings: 10 intervals.
• Land and buildings with less than 10 years to run when acquired (such as a short lease): 5 intervals.
• Vessels and aircraft: 5 intervals.
• Computers already in the scheme before 29 July 2026: 5 intervals.

The first interval runs from the date you acquire the item to the end of that partial exemption year. Each later interval is a full year.

How do you work out an adjustment

Divide the total input VAT by the number of intervals. Multiply that by the change in taxable use since the first interval. A positive answer is extra VAT you reclaim. A negative answer is VAT you pay back. Do this for every interval after the first.

In the first interval you reclaim VAT as normal, using your taxable use percentage for that year. In each later interval, the sum is:

adjustment = (total input VAT ÷ number of intervals) × (this year's taxable use % − first year's taxable use %)

You make the adjustment on the VAT return for the second VAT period after the end of the interval.

Worked example

Say a business buys a building for £1,000,000 plus £200,000 VAT. It has 10 intervals. In the first interval, 60% of its use is taxable. The sums show selected intervals.

Each interval is worth £20,000 of the VAT (£200,000 ÷ 10). The adjustment is only ever a share of that £20,000, so one bad year cannot wipe out the whole original claim.

Under the new rules, a building costing £500,000 plus £100,000 VAT sits below £600,000. The business reclaims £100,000 × 60% = £60,000 in year one. It makes no later adjustments, however its use changes.

What happens if you sell the item

If you sell a capital item, or stop using it in the business, before the adjustment period ends, you make a final adjustment. You treat the remaining intervals as fully taxable if the sale is taxable, or fully exempt if the sale is exempt.

A sale is taxable, for example, where you have opted to tax a commercial building. Get advice if this applies, because the figures can be large.

What to do next

• Check whether any purchase, build or refurbishment reaches £600,000 excluding VAT.
• List the items already in the scheme and the intervals each one has left.
• Diary each adjustment for the second VAT period after the interval ends, using the VAT deadline calculator.
• Read Revenue and Customs Brief 7 (2026) for HMRC's full wording.

This is general guidance. Check gov.uk or ask an accountant about your own case.

Figures in this guide come from our rules file, last checked against HMRC on 4 October 2026.