Capital Goods Scheme: compare this interval with the original VAT recovery
Suppose, hypothetically, a business buys a building for £1,000,000 plus £200,000 VAT and recovers 80% of the VAT in the first interval. In the next interval, more of the building is used for exempt activity and recovery falls to 60%. Under the Capital Goods Scheme, the business does not recalculate the whole £200,000. It takes one interval's share of the VAT and adjusts it for the change from the first-interval baseline, then makes the same comparison in each later interval.
Separate existing items from new acquisitions
Changes to the scheme took effect on 29 July 2026. The land and building threshold is now £600,000 or more excluding VAT, for capital expenditure subject to VAT at the standard or reduced rate. Qualifying ships and aircraft are covered at £50,000 or more excluding VAT.
The £600,000 threshold applies to relevant acquisitions and works on or after 29 July 2026. It does not clear existing registers. Items already within the scheme under the earlier rules, including qualifying computers, stay in it until the end of their adjustment period. Keep two groups separate:
- Existing CGS items: continue each item already covered by the earlier rules until its adjustment period ends, even if it falls below the new threshold.
- New acquisitions and works: test land and building expenditure on or after 29 July 2026 against £600,000, not the former £250,000.
Set the baseline in the first interval
A qualifying building normally has ten intervals; qualifying ships and aircraft have five. A shorter interest can reduce the adjustment period, and intervals are not always full calendar years. The first interval starts at first use and normally ends before the next partial exemption tax year.
The usual recovery calculation for that first interval sets the baseline. Scheme adjustments arise only after later intervals. If the first recovery was wrong, correct the original deduction. A later adjustment cannot replace that correction.
Sources and context, checked :
A hypothetical building
Assume the building has one invoice, ten intervals, no shorter interest and no disposal. Assume also that there is no non-business use or de minimis complication, and that each recovery percentage has been properly established under the applicable method. Any of those factors could change the calculation.
Initial recovery is £200,000 × 80% = £160,000. Each interval's share of the VAT is £200,000 ÷ 10 = £20,000. Each later interval is compared with the 80% baseline, not the interval before it. That is why recovery of 70% in interval 3 still produces a £2,000 reduction, and not a £2,000 increase from the previous 60%.
| Interval | Recovery | Change from 80% baseline | Adjustment on £20,000 |
|---|---|---|---|
| 1 | 80% | Baseline | None |
| 2 | 60% | 20 points lower | £4,000 reduction in recovery |
| 3 | 70% | 10 points lower | £2,000 reduction in recovery |
Sources and context, checked :
Put the adjustment in the right return
The adjustment normally goes in box 4 for the second tax period after the later interval ends. A quarterly filer with a tax year ending in March would normally adjust in the September return, which differs from annual partial exemption timing. Keep the workings in a schedule separate from the general fixed asset register and the current year's purchase VAT calculation, with these details:
- The item, its value and its VAT.
- The input tax first claimed and the method used.
- The first-interval baseline and evidence for each later use percentage.
- Interval start and end dates, adjustment due dates and any disposal.
Sources and context, checked :