The VAT Capital Goods Scheme: Ten-Year Adjustments on Property You Thought Was Settled

Recover VAT on a £2 million development and it is tempting to treat the job as done once the return is filed. For anything over £250,000 net of VAT spent on land, a building, or civil engineering works, it isn't. The Capital Goods Scheme keeps testing how that property is actually used for up to ten years afterwards, and a change of tenant, a change of use, or a lease you didn't renew can trigger a real cash adjustment long after everyone has stopped thinking about the original purchase.

What actually falls within the scheme

The Capital Goods Scheme (CGS) applies to specific categories of high-value capital expenditure: land, buildings, and civil engineering works where the cost exceeds £250,000 net of VAT. That covers an outright purchase, a construction project, and an extension or refurbishment, provided the qualifying spend clears the threshold. It also covers certain computer equipment and aircraft, ships and other vessels at a lower £50,000 threshold, though those categories rarely feature in a property business.

The threshold is tested per item, not aggregated across a portfolio. Buy three commercial units in the same year at £150,000 each and none of them individually enters the scheme, even though the combined spend clears £250,000 many times over. Spend £300,000 refurbishing one of those same units later, and that refurbishment becomes its own separate CGS item, entirely independent of whether the original purchase ever qualified.

The ten-year adjustment period and how the annual test works

Once an item is within the scheme, it carries a ten-year adjustment period for land and buildings, split into intervals that generally track the owner's VAT year. The first interval reflects the initial recovery made when the cost was incurred. Each of the following intervals compares the item's actual taxable use in that year against the original recovery percentage, and if the two differ, an adjustment follows — a repayment to HMRC if taxable use has fallen, or an extra claim if it has risen — equal to one-tenth of the total input VAT multiplied by the change in percentage.

Small year-to-year movements are often immaterial once spread across a tenth of the total VAT. The adjustments that actually matter are the ones following a genuine change in how the building is used: a unit originally let to a VAT-registered tenant under an option to tax, standing empty for a period, then re-let to a tenant who cannot recover VAT, or a scheme built for taxable sale that ends up partly retained and let exempt when the market softens.

Change of use: the trigger everyone forgets

The single most common way a CGS obligation surfaces years after anyone expects it is a genuine change of use. A developer builds a mixed commercial and residential scheme, opts to tax the commercial element, and recovers VAT on the qualifying spend in full. Two years later, an unlet commercial unit is converted to residential use, or an office originally let to a taxable tenant is re-let to an exempt one, or the option to tax is revoked once the cooling-off window has passed. Every one of those events shifts the item's taxable-use percentage for the interval in which it happens, and the scheme requires that shift to be reflected in an adjustment on the VAT return for that year, whether or not anyone remembers the original recovery calculation.

Selling the item partway through the adjustment period is treated as a deemed 100% taxable use for the remainder of the period if VAT is charged on the sale, or 100% exempt use if it isn't. Where the sale is structured as a Transfer of a Going Concern, the seller's remaining CGS obligation and the underlying calculation records transfer to the buyer along with the property — the buyer inherits an ongoing adjustment liability tied to the building's future use, not a clean asset with no VAT history attached.

Refurbishment resets and mixed-use buildings

A refurbishment that itself exceeds £250,000 net of VAT creates a brand new CGS item, with its own ten-year clock running alongside — not instead of — the clock already ticking on the original building. It is a genuinely common mistake to track only the original purchase or construction cost and treat a later refurbishment as simply more input VAT recovered on the day, when in fact it has quietly started an entirely separate ten-year monitoring obligation with its own annual test date.

Mixed-use buildings need the qualifying capital item identified and apportioned in the same way they need apportioning for other purposes — only the portion of the spend properly attributable to the capital item itself is tracked through the scheme, and a building combining, say, ground-floor retail with upper-floor flats needs that split carried through consistently from the original recovery calculation to every later adjustment.

How this sits alongside partial exemption

The Capital Goods Scheme is a separate, standing obligation that runs alongside — not instead of — the standard partial exemption calculation covered in our guide to VAT partial exemption for property businesses. A property business already comfortably within the de minimis limit on its ordinary quarterly and annual figures can still have a CGS item ticking away in the background on a specific building, with its own separate adjustment due regardless of how the wider portfolio's partial exemption position looks that year. The two calculations use related concepts — taxable use, exempt use, an annual true-up — but they are not the same test, and passing one does not exempt a business from the other.

Common mistakes

• Treating the scheme as a one-off filing at the point of recovery, rather than a standing ten-year obligation with a diary date every year
• Forgetting that a refurbishment exceeding the threshold starts a fresh, independent CGS item rather than simply adding to the original one
• Assuming a Transfer of a Going Concern sale ends the seller's CGS exposure, when in fact the obligation and the records transfer to the buyer
• Missing a change in tenant mix, from taxable to exempt or back, that shifts the year's actual-use percentage without anyone flagging it
• Losing the original recovery calculation and supporting records when the person who handled the purchase or the original VAT adviser has since moved on

What this means for developers and investors

Any acquisition, construction project or major refurbishment clearing £250,000 net of VAT should have its CGS position set out at the point of recovery, not reconstructed years later when a tenant changes or a sale is being negotiated. The scheme rewards businesses that keep a simple annual diary note against each qualifying item and penalises those that treat VAT recovery as a closed chapter the moment the return is filed. It is a routine part of the wider VAT structuring we cover under our Property Advisory service, alongside the option to tax and partial exemption decisions it so often sits behind.

Common questions

What is the VAT Capital Goods Scheme?

It is a mechanism that tracks how a high-value capital item — typically land, a building, or civil engineering works costing more than £250,000 net of VAT — is actually used over a ten-year adjustment period, and corrects the input VAT originally recovered if the proportion of taxable use changes from one year to the next.

Does the £250,000 threshold apply per building or across a whole portfolio?

Per item. Each qualifying capital item — a purchase, a construction project, or a refurbishment that itself exceeds £250,000 net of VAT — is tested and tracked separately. Spend is not aggregated across a portfolio, but a single scheme can generate more than one CGS item if the original building and a later refurbishment both independently exceed the threshold.

What happens if I sell a Capital Goods Scheme item partway through the ten-year period?

A sale is generally treated as 100% taxable use for the remainder of the adjustment period if VAT is charged on the sale, or 100% exempt use if it is not. Where the sale qualifies as a Transfer of a Going Concern, the outstanding CGS obligation and the underlying records transfer to the buyer, who inherits the remaining adjustments rather than the item's history ending at completion.

Does a refurbishment start a new Capital Goods Scheme clock?

Yes, if the refurbishment spend itself exceeds £250,000 net of VAT. It becomes a new, separate capital item with its own ten-year adjustment period running alongside — not instead of — the clock already running on the original building.

This article is general information, not personal tax advice, and tax rules change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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