VAT on commercial property

The Capital Goods Scheme Explained

PropertyVAT Team · Updated 21 October 2026 · 3 min read

Most buyers treat VAT recovery as settled once HMRC has paid the reclaim. On larger property purchases it is not. The Capital Goods Scheme keeps the question open for a decade.

What the scheme does

For qualifying property expenditure — broadly land and buildings at £250,000 or more excluding VAT — the scheme spreads the recovery assessment across ten intervals rather than fixing it at purchase.

Each interval, your actual use of the property is compared with the use in the first interval. If the mix of taxable and exempt use has shifted, your recovery is adjusted:

• More taxable use than at the outset — you can recover additional VAT
• More exempt use — you repay part of what you recovered

The scheme runs in both directions. It is a mechanism for fairness over time, not a penalty.

Why it exists

Without it, VAT recovery would be decided by a snapshot on one day.

A business could buy a building, recover the VAT in full on the basis of intended taxable use, then switch it entirely to exempt use a year later and keep the benefit. Equally, a business with exempt use at purchase that later moved to taxable use would be permanently out of pocket.

The scheme tracks what actually happens.

Who it catches

The people most affected are rarely the ones expecting it:

The conversion case is worth highlighting. A buyer who acquires an opted commercial building, recovers the VAT, then converts it to flats for letting has moved from taxable to exempt use — and may face adjustments across the remaining intervals.

A simplified illustration

A company buys an opted office for £1,000,000 plus £200,000 VAT. Fully taxable use in interval one, so it recovers the full £200,000.

In interval four, the building is let to a tenant whose supplies are exempt and the option is disapplied, so the company's use for that interval is exempt.

Broadly, the scheme looks at one tenth of the original VAT for that interval — £20,000 — and adjusts according to the change in use. Repeated across each affected interval, the cumulative clawback can be substantial.

The real calculation is more involved than this, and depends on how use is measured. The point is the shape: recovery is not final at completion.

The record-keeping obligation

This is where the practical difficulty lies. You need to track, for up to ten years:

• The original VAT incurred
• The recovery position in the first interval
• Use in each subsequent interval
• Any adjustments made

Properties change hands, advisers change, finance teams change. The scheme does not care. A buyer acquiring a property that is itself still within an adjustment period needs to understand that position before completing.

What to do

1. Identify at purchase whether the expenditure falls within the scheme.
2. Record the first-interval position properly — it is the benchmark for everything that follows.
3. Ask the seller whether the property is within an existing adjustment period.
4. Flag any planned change of use to your accountant before it happens, not after.
5. Take advice before selling within the adjustment period.
6. Keep the records, including when the people who created them have moved on.

The link to funding

None directly — the scheme affects recovery over time, not the cash you need on completion day.

But it is a reason not to treat the VAT question as closed once the refund arrives. A buyer planning a change of use should understand the ten-year position before committing, because the VAT recovered at purchase may not all be theirs to keep.

This guide is general information, not tax advice. The Capital Goods Scheme is technical and the calculations are fact-specific — take specialist VAT advice.