What is the VAT Capital Goods Scheme and when does it apply?

Full answer

The Capital Goods Scheme stops a business from over- or under-recovering VAT on a large asset just because of how it was used in the year of purchase. Instead of a one-off claim, recovery is reviewed annually over an adjustment period - 10 intervals for land and buildings, and 5 intervals for qualifying computers, aircraft, ships and boats. Each interval you compare that year's taxable-use percentage with the original recovery and make a small clawback or extra claim. It mainly affects businesses that are partly exempt - for example a property company, a financial services firm, a charity, or a private school - because their recovery rate moves up and down year to year. A fully taxable business that always recovers 100% rarely needs CGS adjustments. Worked example (mechanism): a firm buys an office for GBP 600,000 plus VAT and initially uses it 80% for taxable supplies, recovering 80% of the input VAT. If in a later interval taxable use falls to 60%, one tenth of the total VAT is re-tested at the new percentage, and the firm repays the difference for that interval; if use rises, it reclaims more. The adjustment runs for the full 10-year period or until the asset is sold. For 2026/27 the entry thresholds (GBP 250,000 for property, GBP 50,000 for computers/aircraft/ships, net of VAT) and the standard VAT rate of 20% are unchanged. A sale during the adjustment period can trigger a final 'deemed' adjustment for the remaining intervals. Because the calculations interact with partial exemption, keep an asset register noting cost, recovery percentage and each interval. Use a VAT calculator to model the input VAT, and check the detailed rules on gov.uk before filing adjustments.

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