HMRC have indicated that they are proposing making changes to the current Capital Goods Scheme (CGS). Although no decision has officially been made and HMRC is still in the proposal stage, it is important that businesses are aware of potential changes in this area.
What is the Capital Goods Scheme?
The CGS is a VAT adjustment mechanism designed to ensure that VAT recovery on high-value capital assets reflects their actual use by a business over a period of time.
The scheme requires businesses to adjust the amount of input VAT they have reclaimed over a period of 5 or 10 years, depending on the extent of taxable and exempt use within a given tax year. So rather than a one-off recovery of VAT on costs at the time that they are incurred as with all other costs, under CGS the initial VAT recovery is only a starting point and use should then be monitored each year during the CGS period.
The CGS applies to capital assets that meet specific cost thresholds, as follows:
- Land, buildings, and civil engineering works, where the cost is £250,000 or more (excluding VAT) and the adjustment period is 10 years.
- Computers and computer equipment where the cost is £50,000 or more (excluding VAT) and the adjustment period is 5 years.
So what are the possible CGS changes?
The £250,000 threshold for capital expenditure in relation to land and buildings has been in place since 1990 with no increase, so it is unsurprising that this is the area which HMRC is considering changing. Although there is no confirmation of what the new threshold would be, it is likely that this would be somewhere between £600,000 and £1,000,000.
In addition, HMRC is proposing to remove the inclusion of computers and computer equipment from the scope of the CGS entirely.
These changes would generally be welcomed; they would reduce the administrative burden of businesses having to regularly review the CGS position and make what are typically small adjustments. That said, the fact that the CGS limit has remained at £250,000 since 1990 has meant that many Independent Schools which became subject to VAT from 1 January 2025 are able to recover VAT on works to buildings which they would not have been able to had the limits been uprated for inflation in a rare example of negative fiscal drag allowing repayments of tax.
Similarly, the inclusion of computers only ever applied to a single item of computer hardware, so this provision was obsolete almost from the date the CGS was introduced into UK law as networked PC’s appeared a few years later in the early 1990’s.
Interestingly, when HMRC published a call for evidence in this area back in 2019, the consensus was a threshold of £1,000,000, while the British Property Federation, for example, had suggested £2,500,000. So, it remains to be seen as to whether HMRC will only increase the threshold to £600,000 or may be persuaded to increase it further.
Next steps
As noted above these changes are still in the proposal stage and no decision has yet been made. Therefore, no further action is needed at this stage, but businesses should be aware of the possibility, especially if they are undecided on the timings of some future capital expenditure works that may or may not fall within the CGS in the future.
It should also be noted that we would assume that the new threshold would only apply to future expenditure and would not impact expenditure that is currently within CGS, so this would not impact current calculations.
If you have any queries or wish to discuss the above, please do not hesitate to contact Stephen Patey in our VAT department.
