What is the Capital Goods Scheme in plain English?

An annual VAT adjustment for high-value property assets. When you spend £250,000 or more (VAT-exclusive) on land, a building, or a major refurbishment, you recover the input VAT at acquisition based on how you intend to use the property (typically: opted to tax, fully taxable, so full recovery). Over the following 10 years (the 'adjustment period'), HMRC requires you to re-test how the property is actually being used each year. If the taxable-supplies percentage drops, you repay some of the initial recovery. If it rises, you recover more. The mechanism lives in VAT Regulations 1995 regulations 112 to 116.

What is the £250,000 threshold and is it VAT-inclusive or VAT-exclusive?

VAT-exclusive. The CGS applies to capital expenditure on land, buildings, or civil engineering works where the cost is £250,000 or more before VAT is added. The threshold is set in VAT Regulations 1995 reg 113. Computer equipment over £50,000 (VAT-exclusive) and ships or aircraft over £50,000 are also caught but with a 5-interval adjustment period instead of 10. For most commercial property landlords, only the £250,000 land/building threshold is operationally relevant.

When does the 10-interval clock start?

The first interval runs from the date you first use the capital item to the end of your next VAT longer-period (the period your partial-exemption annual adjustment covers, normally a 12-month year). Each subsequent interval is a full 12-month VAT longer-period. So in practice the first interval can be shorter than 12 months and intervals 2 to 10 are 12 months each. The full adjustment period therefore lasts 10 years from the date of first use, give or take the part-year first interval.

How does the per-interval adjustment work?

Each interval, you compare the taxable-supplies use of the property in that interval (the 'recovery percentage' for the year) against the recovery percentage at acquisition (the base interval). The adjustment for the interval is: total VAT on the capital item divided by 10, multiplied by the difference in the two percentages. So if you originally recovered 100% of the VAT but the property is used only 80% for taxable supplies in interval 3, that interval triggers a payment to HMRC of 1/10 × 20 percentage points × total VAT on the item.

Does refurbishment trigger a fresh CGS item?

Yes, when the refurbishment cost is £250,000 or more (VAT-exclusive). A major refurbishment is treated as a separate capital item with its own 10-interval clock starting from the date of first use after the refurb. The original building's CGS clock continues to run on its own timeline, so a property can carry two or three overlapping CGS items at the same time (acquisition + major refurb 1 + major refurb 2). Each is tested independently each interval.

What happens if I sell the property during the 10-interval period?

VAT Regulations 1995 reg 115(3) applies. If the sale is a taxable supply (you opted to tax, sold opted, charged VAT), you are deemed to have used the property 100% for taxable purposes for all remaining intervals. No clawback. If the sale is exempt (you did not opt, or your option was disapplied), you are deemed to have used the property 0% for taxable purposes for all remaining intervals. The unused portion of the initial input VAT recovery is repaid to HMRC in your next VAT return. A mid-life exempt disposal of a recently-acquired £2m opted property can produce a £80,000 to £150,000 CGS clawback bill.

Does the Capital Goods Scheme apply to residential property?

Mostly no. Residential property letting is exempt under VATA 1994 Sch 9 Group 1 and you cannot opt to tax a dwelling (Sch 10 para 5 disapplies the option on dwellings). So there is typically no input VAT to recover on a residential acquisition and the CGS does not bite. CGS can apply where a property is converted from commercial to residential (the conversion zero-rating route under Sch 8 Group 5) but the entry-point analysis is different. For a pure buy-to-let residential landlord, the CGS is not a relevant regime.

Does the CGS interact with partial exemption?

Yes, tightly. CGS adjustments are computed alongside the annual partial-exemption adjustment in the same VAT longer-period. For a partially-exempt landlord (mixed residential/commercial portfolio), the base interval recovery percentage on a CGS asset is determined by your partial-exemption recovery method for the period of acquisition, and each subsequent interval's recovery percentage is determined by the same method applied to that interval's year. Changes in your partial-exemption percentage over the 10 years drive the CGS adjustment each year. See our partial-exemption guide for the standard-method mechanic.

What records do I need to keep for CGS?

VAT Regulations 1995 reg 116 requires you to keep a CGS record for each capital item, retained for the full 10-year adjustment period plus a further 6 years (so 16 years from first use). The record must show: the description and location of the capital item, the total VAT incurred on it, the base interval taxable-use percentage and the resulting initial recovery, the dates of each subsequent interval and the recovery percentage applied to each, the running cumulative adjustment, and the final-interval disposal entry. HMRC may request the CGS record during a VAT inspection at any point in the 10 years.

When can I opt to tax to avoid a CGS clawback on disposal?

You can opt to tax the property up to and including the date of the disposal supply, provided you notify HMRC on VAT1614A within 30 days of the decision. The option must be in place at the time of the supply for the supply to be standard-rated. A late-filed VAT1614A after the supply has happened will not retrospectively make the sale taxable, so the CGS clawback will bite. The 30-day notification window and the relevant disposal date both need to be diarised carefully before a sale during the adjustment period.

What is the most common CGS mistake?

Forgetting that the adjustment runs annually for 10 years regardless of whether the use has changed. Even where a property has been let to fully-taxable commercial tenants throughout, the CGS record must still be maintained, the annual interval reviewed, and a nil-adjustment entry confirmed. Failure to keep CGS records is a separate compliance breach under reg 116 with its own penalty exposure even where the underlying VAT position is correct. The second-most-common mistake is forgetting that a major refurbishment is a fresh CGS item with its own 10-year clock starting on first use.

Property Types & Specialist Tax

VAT Capital Goods Scheme on Property: 10-Year Adjustment Mechanics

23 May 2026 · Property Tax Partners Editorial Team · 12 min read

The Capital Goods Scheme (CGS) is the VAT regime that locks input-tax recovery on UK commercial property into a 10-year review window. Where a property purchase, construction, or refurbishment costs £250,000 or more (VAT-exclusive) and the input VAT is recovered through an option-to-tax election, the CGS tracks how the property is used over the next 10 intervals and adjusts the initial recovery up or down to match. The mechanism sits under VAT Regulations 1995 regs 112 to 116 and is the most-overlooked downstream consequence of opting to tax. This guide sets out the £250,000 trigger, the 10-interval clock, the per-interval adjustment formula, refurbishment as a separate CGS item, the final-interval rule on disposal, and the interaction with TOGC and partial exemption.

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Input VAT recovered today is not input VAT kept forever. For UK commercial property that has been opted to tax and where the acquisition (or major refurbishment) crosses £250,000 of VAT-exclusive expenditure, the Capital Goods Scheme (CGS) keeps the recovery under review for the next 10 years. Each year an interval test runs: how much of the property's use was taxable in that interval, how does that compare with the base interval recovery, and what is the adjustment in this year's VAT return. The mechanism is set out in VAT Regulations 1995 regulations 112 to 116 and is the single largest cash-flow tail attached to any opt-to-tax election.

This page works through the CGS from threshold to disposal: the £250,000 VAT-exclusive trigger, the 10-interval clock and what counts as an interval, the per-interval adjustment formula, refurbishment treated as a fresh CGS item, the final-interval rule on a mid-period sale, and the TOGC interaction. The mechanic is dry but the cash impact on a £2 million to £20 million commercial asset is substantial: a single botched annual adjustment can return six figures of recovered VAT to HMRC with interest.

What the Capital Goods Scheme Does

The CGS provides for an annual reconciliation of input VAT recovered on a defined category of high-value capital assets. The recovery at acquisition is determined by the intended use at that time (the base interval). Each of the next several years (the subsequent intervals) the actual use is tested against the base, and an adjustment is computed and paid or recovered through the next VAT return.

For property, the policy logic is that a 25-year (or longer) commercial asset's actual use will inevitably drift from its initial use as tenants change, refurbishments happen, partial-exemption percentages move, and the option-to-tax position evolves. The CGS prevents a one-off recovery decision at acquisition from locking in a recovery that no longer matches the ultimate use of the property.

The £250,000 VAT-Exclusive Threshold

VAT Regulations 1995 reg 113 defines which assets are caught. The thresholds are VAT-exclusive (the gross cost before VAT is added) and differ by asset class:

Asset class	Threshold (VAT-exclusive)	Adjustment period
Land, buildings, civil engineering works (including major refurbishment)	£250,000	10 intervals
Computers and computer equipment	£50,000	5 intervals
Ships, boats, aircraft, vessels	£50,000	5 intervals

The £250,000 figure has applied for the full operational life of the modern CGS regime (introduced by SI 1995/2518 and amended at intervals since). It is not a £250,000-per-year limit, it is a £250,000-per-asset limit. A £2 million commercial property is one CGS asset; a £900,000 refurbishment of that property three years later is a second, separate CGS asset.

What counts as "capital expenditure" for CGS purposes

The expenditure must be on land, on the construction or alteration of a building, on a major refurbishment, or on civil engineering works (typically the substantial substructure works on industrial or transport assets). Repairs, redecoration, and routine maintenance do not count, even where the total cost crosses £250,000 across multiple invoices in a year. The HMRC test (Notice 706/2 section 4) focuses on whether the work has produced a substantially altered, modernised, or extended capital asset.

The 10-Interval Clock

An "interval" is defined by VAT Regulations 1995 reg 114. The first interval runs from the date of first use of the capital item to the end of the owner's next partial-exemption longer-period (typically the next 1 April or the next anniversary of registration). Each subsequent interval is a full 12-month partial-exemption longer-period. So:

Interval 1 (the base interval): typically less than 12 months, from first use to the next year-end.
Intervals 2 to 10: each 12 months, ending on the partial-exemption year-end.

The adjustment for each interval is computed in the second VAT return after the interval ends (Notice 706/2 section 5). So a property whose interval ends on 31 March is reconciled in the VAT return for the June-September quarter, payable by 7 November (the normal MTD timing).

The first interval (the base interval) sets the baseline recovery percentage against which every later interval is compared. A property opted to tax and used 100% for taxable supplies in the base interval has a base recovery of 100%, against which any future drop in taxable use produces a positive HMRC payment.

The Per-Interval Adjustment Formula

The mechanic in VAT Regulations 1995 reg 115:

Adjustment for an interval = (total VAT on the capital item ÷ number of intervals in the adjustment period) × (interval taxable-use percentage − base interval taxable-use percentage)

For a property with 10 intervals and £400,000 of total input VAT, each interval's adjustment is:

(£400,000 ÷ 10) × (interval % − base interval %) = £40,000 × percentage-point difference.

So if the base interval recovery was 100% and the interval-4 recovery is 80%, the interval-4 adjustment is £40,000 × 20 percentage points = an £8,000 repayment to HMRC. If interval-4 recovery rises to 110% (which is impossible in practice, capped at 100%, included to illustrate the symmetry of the formula), the adjustment would be an £8,000 additional recovery to the landlord.

The "taxable-use percentage" each interval is determined by the landlord's partial-exemption method applied to the property's actual use that year. For a single-let opted commercial property let to a fully-taxable tenant, the percentage is 100% throughout and no adjustment arises. For a mixed-portfolio landlord whose partial-exemption percentage on the property shifts each year (commercial element opted, residential element exempt, tenant mix evolving), each interval may produce a small adjustment up or down.

Refurbishment as a Fresh CGS Item

VAT Regulations 1995 reg 113(2) treats major refurbishment, extension, or alteration costing £250,000 or more (VAT-exclusive) as a separate capital item. The fresh 10-interval clock starts on the date of first use after the refurbishment is complete. The original property's CGS clock continues to run on its own timeline.

A practical consequence: a commercial property acquired in 2020 (interval 1 starts) and substantially refurbished in 2025 (a second CGS item, interval 1 starts) carries two overlapping CGS records through 2030. Each is tested independently each year. Each has its own base interval, its own total VAT, and its own per-interval adjustment. Disposal of the property crystallises both items simultaneously under reg 115(3).

HMRC's distinction between "major refurbishment" (CGS-relevant) and "ordinary repairs" (not CGS-relevant) is fact-driven. The leading guidance is Notice 706/2 section 4 plus the VAT Manual at PE63500 onwards. The test is whether the work has produced a substantially altered asset; cosmetic refresh and routine maintenance do not qualify.

Worked example: overlapping CGS items on a single property

An anonymised property company acquires a city-centre office building in 2026 for £4,000,000 (VAT-exclusive). The property is opted to tax and £800,000 of input VAT is recovered. This is CGS item 1, with 10 intervals running 2026 to 2036.

In 2029 the company funds a £600,000 (VAT-exclusive) reception-and-common-parts refurbishment to attract a new anchor tenant. Input VAT of £120,000 is recovered. This is CGS item 2, with its own 10 intervals running 2029 to 2039.

In 2033 the company funds a further £450,000 (VAT-exclusive) net-zero-readiness upgrade (heat pump, photovoltaic roof, MEP renewal). Input VAT of £90,000 is recovered. This is CGS item 3, with its own 10 intervals running 2033 to 2043.

From 2033 onwards the property carries three concurrent CGS records. Each interval each CGS item is independently tested: item 1 ends in 2036, item 2 in 2039, item 3 in 2043. A disposal in 2034 would crystallise final-interval adjustments on all three items simultaneously under reg 115(3). The CGS record must enumerate all three items, their base intervals, and their running adjustments.

Disposal During the Adjustment Period

A mid-period disposal triggers a final-interval treatment under VAT Regulations 1995 reg 115(3) to (3ZA). The mechanic differs based on whether the disposal is taxable or exempt.

Taxable disposal (opted, charged 20% VAT)

The owner is treated as having used the capital item wholly for taxable supplies for all remaining intervals. If the base interval recovery was less than 100%, this produces a one-off positive adjustment in the period of disposal: the owner recovers the remaining input VAT that had not yet been recovered through the normal interval-by-interval mechanism.

Exempt disposal (no option, or option disapplied)

The owner is treated as having used the capital item not at all for taxable supplies for all remaining intervals. If the base interval recovery was 100%, this produces a one-off negative adjustment in the period of disposal: the owner repays the unused proportion of the original recovery to HMRC.

Worked example

An anonymised investor acquires a £2,200,000 (VAT-exclusive) opted commercial property in 2026 and recovers £440,000 of input VAT at 20%. Base interval (interval 1) recovery is 100%. The property is let to a fully-taxable corporate tenant for intervals 2 to 6.

In interval 7 (2032) the landlord lets a vacant suite to a new tenant who is substantially VAT-exempt (a private healthcare clinic), and a Sch 10 paras 12-17 connected-party concern triggers HMRC to disapply the option in respect of that suite for the remaining intervals. The interval 7 recovery percentage drops from 100% to 70%.

Then in interval 8 (2033) the landlord sells the property to a residential developer who issues VAT1614D to disapply the option (the property is to be converted to flats). The sale is exempt.

Event	Calculation	Adjustment
Intervals 1-6: 100% taxable use	No drift from base	£0 each year
Interval 7: 70% taxable use	£440,000 ÷ 10 × (70% − 100%) = £44,000 × −30 percentage points	£13,200 repaid to HMRC
Interval 8: exempt disposal in mid-interval	Treated as 0% taxable for intervals 8, 9, 10 (three remaining intervals). £440,000 ÷ 10 × (0% − 100%) × 3 intervals	£132,000 repaid to HMRC
Total CGS clawback on sale		£145,200

The £145,200 sits on top of any other transaction-level VAT costs (the developer's SDLT relief from the residential conversion, the seller's own conveyancing and VAT-advisory fees). The structural cure here would have been for the landlord to opt to tax the sale itself rather than accept the buyer's VAT1614D disapplication, but the buyer was a residential developer that genuinely could not absorb £440,000 of VAT in the deal; the trade-off was negotiated as a price chip and the CGS clawback was accepted.

TOGC Interaction

Sale of a capital item under TOGC (Article 5 of the VAT (Special Provisions) Order 1995) does not crystallise the CGS final-interval clawback. Instead VAT Regulations 1995 reg 115(11) provides that the buyer steps into the seller's CGS position for the remainder of the 10-interval clock. The buyer continues the seller's interval-by-interval adjustments using the seller's original base-interval recovery percentage.

For TOGC to apply on opted commercial property the buyer must satisfy the standard TOGC conditions and, critically, must notify its own option to tax on VAT1614A by the relevant date. Where TOGC fails (buyer's late VAT1614A, buyer not VAT-registered, the going-concern test not met), the sale reverts to a taxable supply and the CGS clawback question does not arise on the seller's side; the seller's option remains live and the sale is fully taxable.

The practical handover: at completion the seller hands the buyer a complete CGS record (acquisition VAT, base interval, all intermediate adjustments, current interval position). Without that record the buyer cannot lawfully maintain the CGS register going forward. This is a frequently overlooked completion deliverable; it is worth listing it explicitly in the sale-and-purchase contract. See the depth treatment in our TOGC and VAT on property letting businesses guide.

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Interaction with the Option to Tax

CGS bites on capital expenditure that was input-tax recoverable at acquisition. For commercial property held by a partially-exempt or fully-exempt landlord, that recovery typically only arises because an option to tax has been notified. The two regimes are intertwined.

OTT notified before first use: base interval recovery reflects the opted position (usually 100% taxable, 100% recovery).
OTT notified during the adjustment period (after some exempt rent has already been charged): base interval recovery reflects mixed use; subsequent intervals reflect the post-opt taxable use.
OTT revoked during the adjustment period (under Sch 10 para 23 cooling-off, or after the 6-year non-interest condition): the property's taxable-use percentage drops for the remaining intervals and CGS clawback follows.

The depth treatment of the OTT mechanic is in our VAT option to tax guide. The CGS treatment here picks up where the OTT election leaves off.

Interaction with Partial Exemption

The CGS does not replace partial exemption; the two regimes run side by side. Partial exemption (under the standard method in VAT Regulations 1995 reg 101 or an approved special method) governs the period-by-period recovery of residual input VAT on overhead and dual-use inputs. The CGS governs the long-tail re-test of recovery on each individual capital item that crossed the £250,000 threshold.

For a partially-exempt landlord with a portfolio of commercial and residential property:

The partial-exemption percentage drives the period-by-period recovery on overhead costs (administration, professional fees not attributable to a specific property, technology, finance).
The CGS recovery percentage on each capital item uses the same partial-exemption method but applied specifically to the input VAT on that asset, both in the base interval (acquisition) and in each subsequent interval (re-test).
Changes in the portfolio mix (a new commercial acquisition, a residential let coming under management, a disposal) flow through to both regimes in the same VAT longer-period.

HMRC's Partial Exemption Manual at PE63000 onwards sets out the calculation interaction in detail. The key practical point: a portfolio's partial-exemption percentage moves each year, which moves each CGS item's interval recovery percentage each year, which produces a CGS adjustment each year. A passive single-let opted commercial property in a complex multi-property portfolio can still throw up annual CGS adjustments because the partial-exemption percentage governing its recovery moves around it.

For the partial-exemption mechanic in isolation, see our forthcoming partial-exemption depth page on mixed residential / commercial portfolios.

Records and Compliance

VAT Regulations 1995 reg 116 sets the record-keeping requirements. For each CGS item the owner must keep:

The description and location of the capital item.
The total input VAT incurred.
The base interval taxable-use percentage and the initial recovery amount.
The start and end date of each interval, the taxable-use percentage in that interval, and the per-interval adjustment amount.
Any final-interval entry on disposal.

The CGS record must be retained for the full 10-interval adjustment period plus a further 6 years (so 16 years from first use), per the general VAT record-retention requirement. A nil-adjustment entry for an interval where use was unchanged is still a required record. HMRC routinely tests CGS records during routine inspections of property-holding businesses.

Common CGS Mistakes

Treating a major refurbishment as ordinary repairs and missing the £250,000 CGS trigger. A major refit at the start of a new tenant fit-out is often the test boundary; HMRC's view is that anything substantially altering, extending, or modernising the building is capital.
Failing to maintain CGS records during years where use is stable. Reg 116 requires a record each interval even if the adjustment is nil. Absent records, HMRC reconstructs the position and the burden of proof on the taxpayer is heavy.
Forgetting that TOGC requires handover of the CGS record. The buyer cannot maintain the position without it; in practice this is often a 6-month-after-completion scramble that should have been a Day 1 deliverable.
Crystallising a CGS clawback on an exempt disposal without modelling the OTT-on-sale alternative first. An opted sale may be the cheaper outcome even where the buyer would prefer exempt.
Treating two separate refurbishments as one for CGS-threshold purposes. Each is tested on its own £250,000 VAT-exclusive cost; bundling two below-threshold projects does not aggregate them into one CGS item.
Misapplying the partial-exemption recovery method to the base interval. The base interval recovery percentage is the cornerstone of every subsequent adjustment; an arithmetic mistake here propagates through 10 years of CGS records.
Selling within the adjustment period and forgetting reg 115(3) entirely. The final-interval clawback is not optional and not deferrable; it is computed and paid in the VAT return for the period of disposal.

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Frequently asked questions

What is the Capital Goods Scheme in plain English?: An annual VAT adjustment for high-value property assets. When you spend £250,000 or more (VAT-exclusive) on land, a building, or a major refurbishment, you recover the input VAT at acquisition based on how you intend to use the property (typically: opted to tax, fully taxable, so full recovery). Over the following 10 years (the 'adjustment period'), HMRC requires you to re-test how the property is actually being used each year. If the taxable-supplies percentage drops, you repay some of the initial recovery. If it rises, you recover more. The mechanism lives in VAT Regulations 1995 regulations 112 to 116.
What is the £250,000 threshold and is it VAT-inclusive or VAT-exclusive?: VAT-exclusive. The CGS applies to capital expenditure on land, buildings, or civil engineering works where the cost is £250,000 or more before VAT is added. The threshold is set in VAT Regulations 1995 reg 113. Computer equipment over £50,000 (VAT-exclusive) and ships or aircraft over £50,000 are also caught but with a 5-interval adjustment period instead of 10. For most commercial property landlords, only the £250,000 land/building threshold is operationally relevant.
When does the 10-interval clock start?: The first interval runs from the date you first use the capital item to the end of your next VAT longer-period (the period your partial-exemption annual adjustment covers, normally a 12-month year). Each subsequent interval is a full 12-month VAT longer-period. So in practice the first interval can be shorter than 12 months and intervals 2 to 10 are 12 months each. The full adjustment period therefore lasts 10 years from the date of first use, give or take the part-year first interval.
How does the per-interval adjustment work?: Each interval, you compare the taxable-supplies use of the property in that interval (the 'recovery percentage' for the year) against the recovery percentage at acquisition (the base interval). The adjustment for the interval is: total VAT on the capital item divided by 10, multiplied by the difference in the two percentages. So if you originally recovered 100% of the VAT but the property is used only 80% for taxable supplies in interval 3, that interval triggers a payment to HMRC of 1/10 × 20 percentage points × total VAT on the item.
Does refurbishment trigger a fresh CGS item?: Yes, when the refurbishment cost is £250,000 or more (VAT-exclusive). A major refurbishment is treated as a separate capital item with its own 10-interval clock starting from the date of first use after the refurb. The original building's CGS clock continues to run on its own timeline, so a property can carry two or three overlapping CGS items at the same time (acquisition + major refurb 1 + major refurb 2). Each is tested independently each interval.
What happens if I sell the property during the 10-interval period?: VAT Regulations 1995 reg 115(3) applies. If the sale is a taxable supply (you opted to tax, sold opted, charged VAT), you are deemed to have used the property 100% for taxable purposes for all remaining intervals. No clawback. If the sale is exempt (you did not opt, or your option was disapplied), you are deemed to have used the property 0% for taxable purposes for all remaining intervals. The unused portion of the initial input VAT recovery is repaid to HMRC in your next VAT return. A mid-life exempt disposal of a recently-acquired £2m opted property can produce a £80,000 to £150,000 CGS clawback bill.
Does TOGC transfer the CGS position to the buyer?: Yes. Under VAT Regulations 1995 reg 115(11), a TOGC transfer of a CGS asset is not treated as a disposal for CGS purposes. Instead, the buyer steps into the seller's shoes for the remainder of the 10-interval clock. The buyer must continue the seller's CGS adjustments using the seller's original base interval recovery percentage. The seller must hand over a copy of the CGS records (acquisition input tax, base interval recovery, interval-by-interval adjustments to date) to the buyer at completion. Failure to transfer records is a common TOGC failure mode.
Does the Capital Goods Scheme apply to residential property?: Mostly no. Residential property letting is exempt under VATA 1994 Sch 9 Group 1 and you cannot opt to tax a dwelling (Sch 10 para 5 disapplies the option on dwellings). So there is typically no input VAT to recover on a residential acquisition and the CGS does not bite. CGS can apply where a property is converted from commercial to residential (the conversion zero-rating route under Sch 8 Group 5) but the entry-point analysis is different. For a pure buy-to-let residential landlord, the CGS is not a relevant regime.
Does the CGS interact with partial exemption?: Yes, tightly. CGS adjustments are computed alongside the annual partial-exemption adjustment in the same VAT longer-period. For a partially-exempt landlord (mixed residential/commercial portfolio), the base interval recovery percentage on a CGS asset is determined by your partial-exemption recovery method for the period of acquisition, and each subsequent interval's recovery percentage is determined by the same method applied to that interval's year. Changes in your partial-exemption percentage over the 10 years drive the CGS adjustment each year. See our partial-exemption guide for the standard-method mechanic.
What records do I need to keep for CGS?: VAT Regulations 1995 reg 116 requires you to keep a CGS record for each capital item, retained for the full 10-year adjustment period plus a further 6 years (so 16 years from first use). The record must show: the description and location of the capital item, the total VAT incurred on it, the base interval taxable-use percentage and the resulting initial recovery, the dates of each subsequent interval and the recovery percentage applied to each, the running cumulative adjustment, and the final-interval disposal entry. HMRC may request the CGS record during a VAT inspection at any point in the 10 years.
When can I opt to tax to avoid a CGS clawback on disposal?: You can opt to tax the property up to and including the date of the disposal supply, provided you notify HMRC on VAT1614A within 30 days of the decision. The option must be in place at the time of the supply for the supply to be standard-rated. A late-filed VAT1614A after the supply has happened will not retrospectively make the sale taxable, so the CGS clawback will bite. The 30-day notification window and the relevant disposal date both need to be diarised carefully before a sale during the adjustment period.
What is the most common CGS mistake?: Forgetting that the adjustment runs annually for 10 years regardless of whether the use has changed. Even where a property has been let to fully-taxable commercial tenants throughout, the CGS record must still be maintained, the annual interval reviewed, and a nil-adjustment entry confirmed. Failure to keep CGS records is a separate compliance breach under reg 116 with its own penalty exposure even where the underlying VAT position is correct. The second-most-common mistake is forgetting that a major refurbishment is a fresh CGS item with its own 10-year clock starting on first use.

VAT Capital Goods Scheme on Property: 10-Year Adjustment Mechanics

What the Capital Goods Scheme Does

The £250,000 VAT-Exclusive Threshold

What counts as "capital expenditure" for CGS purposes

The 10-Interval Clock

The Per-Interval Adjustment Formula

Refurbishment as a Fresh CGS Item

Worked example: overlapping CGS items on a single property

Disposal During the Adjustment Period

Taxable disposal (opted, charged 20% VAT)

Exempt disposal (no option, or option disapplied)

Worked example

TOGC Interaction

Want this checked against your specific situation?

Interaction with the Option to Tax

Interaction with Partial Exemption

Records and Compliance

Common CGS Mistakes

Authorities

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Frequently asked questions

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Council Tax for New Builds: When Liability Begins, the s.17 Completion-Notice Machinery, and the Valuation Tribunal Appeal Route

What the Capital Goods Scheme Does

The £250,000 VAT-Exclusive Threshold

What counts as "capital expenditure" for CGS purposes

The 10-Interval Clock

The Per-Interval Adjustment Formula

Refurbishment as a Fresh CGS Item

Worked example: overlapping CGS items on a single property

Disposal During the Adjustment Period

Taxable disposal (opted, charged 20% VAT)

Exempt disposal (no option, or option disapplied)

Worked example

TOGC Interaction

Want this checked against your specific situation?

Interaction with the Option to Tax

Interaction with Partial Exemption

Records and Compliance

Common CGS Mistakes

Related Reading

Authorities

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Frequently asked questions

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