The capital goods scheme keeps VAT recovery on expensive assets under review for a decade, adjusting it as the use of the asset changes. It does not defer the deduction into annual instalments: you recover input tax up front on the intended use, and the scheme then adds or claws back an adjustment at the end of each subsequent interval as the taxable use of the asset moves. It is the reason a business that recovered VAT in full on a building in 2020 can be writing cheques to HMRC in 2027 — and the rules changed materially in 2026, raising the land and buildings threshold to £600,000 and taking computers out of the scheme altogether.
What is inside the scheme now
Two categories of capital item remain:
- Land and buildings — an interest in land or a building, or expenditure on construction, refurbishment, fit-out, alteration or extension, where the VAT-exclusive value is £600,000 or more. The adjustment period runs for 10 intervals;
- Aircraft, ships, boats and other vessels with a VAT-exclusive value of £50,000 or more, adjusted over 5 intervals.
Computers were removed from the scheme in July 2026 and are no longer capital goods scheme items — a simplification that removes a great deal of low-value tracking from businesses that never had much adjustment to make on IT equipment in the first place. The raising of the property threshold from its long-standing level does the same job at the other end: a large number of mid-sized property projects that used to require a decade of annual calculations now fall outside the scheme entirely.
How the adjustment works
The principle is that VAT recovery should reflect how an asset is actually used over its life, not how it was expected to be used in the year it was bought.
In the first interval, input tax is recovered on the normal basis — fully where the asset is used for taxable supplies, partially where the business is partly exempt, not at all where the use is wholly exempt. In each subsequent interval, the business compares that interval's taxable use percentage with the original one. If the proportions differ, a fraction of the original VAT is repaid to HMRC or reclaimed from it: for a building, one tenth of the original input tax multiplied by the percentage-point change in taxable use.
A worked shape makes it concrete. A company builds premises for £1 million plus £200,000 VAT and recovers all of it because the building is used entirely for taxable supplies. In interval four, 40% of the building is let on an exempt basis. The adjustment is one tenth of £200,000, multiplied by the 40 percentage-point fall in taxable use — £8,000 payable to HMRC for that interval, and the same again in each subsequent interval while the exempt use continues.
The events that trigger it
Adjustments do not only arise from partial exemption arithmetic. They are also triggered by:
- A change of use — part of a property let out, or a trading activity replaced by an exempt one;
- Opting to tax, or revoking an option, which flips the liability of rents and therefore the recovery position;
- Disposal during the adjustment period, which triggers a final adjustment treating the remaining intervals as if the asset had been used entirely for the type of supply the sale represented — a taxable sale can therefore generate a substantial recovery of VAT originally blocked, and an exempt sale the reverse;
- Deregistration, and transfers of a business as a going concern, where the scheme obligations pass to the transferee along with the record-keeping.
That last point causes more problems than the arithmetic. A buyer taking over a business as a going concern inherits the capital goods scheme history and the duty to keep adjusting — and frequently discovers this years later, having never received the records from the seller.
Where it goes wrong
Three failures recur. The first is simply not tracking capital items at all: nobody flags the qualifying expenditure at the time, no schedule is created, and the obligation surfaces on a VAT inspection when the officer asks for the scheme records. The second is tracking them and then forgetting — the schedule exists, the person who maintained it left, and the annual adjustment stops being made. The third is treating the first interval as the answer, which is only true for a business whose use never changes.
The remedy is a capital items register: one line per qualifying asset, with the cost, the VAT, the first-interval recovery percentage, the interval end dates and the adjustments made. It takes an hour to set up at the point of the expenditure and is close to impossible to reconstruct seven years later.
Planning around it
Because the scheme looks at use across a decade, decisions taken early determine a lot of tax. Three are worth modelling before committing:
Whether to opt to tax a property, which secures recovery on the construction cost but makes rents standard rated and can deter exempt tenants such as charities, banks and insurers. Whether to hold the property in a separate entity, since the recovery position follows the entity's own supplies and a VAT group changes the analysis again. And the timing of a disposal, since a sale inside the adjustment period generates an adjustment that can swing either way and is frequently worth six figures on a commercial building.
Acumon handles capital goods scheme registers and adjustments as part of VAT compliance work, with partial exemption methods and property VAT advice where the two interact — which, on any significant building, they always do. If you incurred large property VAT in the last ten years and have never made an adjustment, that is worth checking before someone else checks it.