The VAT Capital Goods Scheme: Adjusting Input VAT Over Several Years (2026)
If your business buys expensive property, computer equipment or aircraft and its taxable use changes over time, the VAT Capital Goods Scheme requires you to adjust your original input VAT claim annually. Here's how it works.
Why the scheme exists
Ordinarily, when a VAT-registered business buys an asset, it reclaims input VAT based on its intended use at the time of purchase — fully reclaimable if used entirely for taxable business activities, partially reclaimable (or not at all) if used for exempt activities or non-business purposes. For most assets, this one-off calculation is the end of the matter. But for a small category of very expensive, long-lived assets, HMRC requires an ongoing annual review, because the proportion of taxable use can genuinely shift significantly over such a long asset life — the Capital Goods Scheme (CGS) exists to true up the original claim to reflect actual use over time.
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| Asset type | Threshold (excluding VAT) | Adjustment period |
|---|---|---|
| Land and buildings (including major refurbishments) | £250,000 or more | 10 years (intervals) |
| Computer equipment (and closely related items) | £50,000 or more | 5 years (intervals) |
Assets below these thresholds are outside the scheme entirely, regardless of how their taxable use might change — the CGS is specifically targeted at a small number of very high-value, long-life capital assets.
How the annual adjustment works
Each year (interval) within the adjustment period, you compare:
- The taxable use percentage applied in your original input VAT claim, against
- The actual taxable use percentage for that specific year.
If the actual use is higher than originally claimed, you can claim additional input VAT. If actual use is lower, you must repay a portion of the input VAT you originally reclaimed.
Worked example: a mixed-use office building
Suppose a partially exempt business buys an office building for £400,000 (excluding VAT), reclaiming input VAT based on an estimated 60% taxable use in year one.
| Year | Actual taxable use | Adjustment needed |
|---|---|---|
| Year 1 | 60% (matches original estimate) | No adjustment |
| Year 2 | 70% (taxable activity increased) | Additional input VAT reclaimed for the increase |
| Year 3 | 50% (taxable activity decreased) | Input VAT repayment for the decrease |
| ... continues for 10 years total |
Each year's adjustment is calculated as one-tenth of the total input VAT on the building, multiplied by the change in taxable use percentage compared with the original baseline — meaning the adjustments are relatively modest in any single year, spread across the full 10-year period rather than a single large one-off correction.
Selling the asset mid-scheme
If you sell (or otherwise dispose of) the asset during its adjustment period, the scheme requires a final adjustment, based on the VAT treatment of the sale itself:
| Sale VAT treatment | Effect on remaining intervals |
|---|---|
| Sale is a taxable supply (e.g., standard-rated commercial property sale, or an option to tax has been made) | Remaining intervals treated as if the asset had been 100% taxable use |
| Sale is VAT-exempt (e.g., certain property sales without an option to tax) | Remaining intervals treated as if the asset had been 100% exempt use |
This can produce a substantial one-off adjustment in the year of sale, particularly if the actual historic taxable use had been quite different from either 100% or 0% — worth factoring into the financial planning around a sale of any CGS-caught asset well before the transaction, since the VAT position can materially affect the net proceeds.
Practical record-keeping
Because the scheme runs for up to 10 years, businesses need robust, ongoing records of:
- The original qualifying cost and input VAT reclaimed.
- The taxable use percentage calculated and used for the original claim.
- Annual reviews of actual taxable use for each interval, with supporting workings.
- Any change of use, refurbishment, or disposal events during the adjustment period, which can each trigger their own specific adjustment rules.
Given the multi-year nature of the scheme and the potential for meaningful VAT sums to be involved on assets crossing the £250,000/£50,000 thresholds, most businesses caught by the Capital Goods Scheme find it worthwhile to build the annual review into their standard VAT return preparation process, rather than treating it as a one-off calculation at the point of purchase.
Use our VAT calculator to estimate the VAT implications of a capital asset purchase and plan for the Capital Goods Scheme's ongoing review requirements if your business has partially exempt or mixed-use activities.
Frequently asked questions
What assets fall under the VAT Capital Goods Scheme?
Land and buildings costing £250,000 or more (excluding VAT), and computer equipment (including some related items) costing £50,000 or more (excluding VAT), where the asset is used for both taxable and exempt purposes and that mix might change over time.
How long does the Capital Goods Scheme adjustment period last?
10 years (or 10 intervals) for land and buildings, and 5 years (or 5 intervals) for computer equipment, starting from the first full year of use, with each subsequent interval potentially requiring an adjustment to the original input VAT claim.
Why would my input VAT claim need adjusting each year?
Because the scheme is designed to reflect actual taxable use of the asset over its adjustment period, not just your intended use at the point of purchase. If your business's proportion of taxable (VAT-reclaimable) activity increases or decreases in a later year, the scheme requires a corresponding adjustment to the VAT originally reclaimed.
Does the Capital Goods Scheme apply if I use the asset 100% for taxable business purposes?
If your business is fully taxable (no exempt or non-business use) throughout the adjustment period, there's typically no adjustment needed, since your input VAT position doesn't change year to year — the scheme mainly matters for partially exempt businesses or those with mixed business/non-business use.
What happens if I sell the asset during the adjustment period?
Selling the asset during the adjustment period triggers a final adjustment, treating the remaining intervals as if the asset had been used 100% for taxable purposes (if the sale itself is taxable) or 100% exempt (if the sale is VAT-exempt), which can result in a significant one-off adjustment in the year of sale.
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