DEEKS VAT NEWSLETTER

Issue 77 | 10 July 2026

Making Complex VAT Simple

Welcome from Jane

Welcome to another edition of the Deeks VAT Newsletter.

One of the things I love about VAT is that there is always something new to learn. One of the things I don’t love quite so much is that those changes often arrive with very little warning!

This week is a perfect example.

HMRC has finally confirmed the implementation date for the long-awaited changes to the Capital Goods Scheme, with the new rules taking effect from 29 July 2026. For many businesses, particularly property owners and developers, these changes will significantly reduce the number of assets caught by the scheme and remove computers entirely from the annual adjustment process.

In my view, this is one of the most welcome VAT simplification measures we’ve seen for several years.

Elsewhere this week we’ve seen another busy week in the Tribunals, covering everything from zero-rating construction work and dental aligners to the evidence needed to recover input tax. Each case provides useful lessons for businesses and advisers alike, and I’ve summarised the practical implications rather than simply repeating the judgments.

You’ll also find an interesting update from the meeting between the International VAT Association and the French tax authorities, together with an opportunity to help improve HMRC’s customer service through an important ICAEW and CIOT research project.

As always, my aim is not simply to tell you what has changed.

I want to explain why it matters, what practical lessons can be learned and how you can avoid costly VAT mistakes.

I hope you enjoy this week’s newsletter.

Jane Deeks LLB (Hons) CTA

Founder and CEO

Deeks VAT Consultancy Ltd

VAT News Round-up

Capital Goods Scheme changes finally receive an implementation date

After months of anticipation, HMRC has confirmed that the reforms to the Capital Goods Scheme (CGS) will come into force on 29 July 2026.

These changes are intended to simplify the VAT system and reduce the administrative burden for businesses.

Computers leave the Capital Goods Scheme

One of the biggest practical changes is that computers and computer equipment will no longer fall within the Capital Goods Scheme.

At present, qualifying computer expenditure has to be monitored over several years, with annual adjustments being made if taxable use changes.

From 29 July, that ongoing monitoring requirement disappears for new qualifying expenditure.

For many businesses this will remove an administrative task that often added little practical value.

Property threshold increases to £600,000

The second major reform affects property.

The Capital Goods Scheme currently applies where qualifying expenditure on land, buildings or civil engineering works exceeds £250,000 (excluding VAT).

From 29 July 2026, that threshold increases dramatically to £600,000 (excluding VAT).

This means many refurbishment and construction projects that currently fall within the scheme will no longer require annual CGS adjustments.

Why does this matter?

For businesses that only occasionally undertake major property projects, the Capital Goods Scheme can be one of the most complicated areas of VAT compliance.

It requires annual reviews over a ten-year period, with adjustments to input tax recovery if the use of the property changes between taxable and exempt activities.

Removing smaller projects from the regime should reduce compliance costs considerably.

Jane’s View

This is a sensible change.

The Capital Goods Scheme was designed to ensure fairness where the use of expensive assets changes over time. However, the existing thresholds have meant that many relatively modest commercial projects have been caught by rules originally intended for much larger investments.

Increasing the threshold to £600,000 better reflects modern construction costs and should remove a significant amount of unnecessary administration.

That said, businesses involved in larger commercial property developments should not assume the CGS has become irrelevant. The scheme remains one of the most important areas to consider whenever there is exempt income, partial exemption or a change in the intended use of a property.

My advice is simple: if you’re planning a significant property project, review the VAT position before work starts—not after the invoices arrive.

Tribunal Watch

Tribunal decisions often shape how VAT legislation is interpreted in practice. While every case turns on its own facts, many contain valuable lessons for businesses and advisers.

Here are the decisions that caught my attention this week.

Construction of a Secure Mental Health Facility – When is Residential Accommodation Not a “Relevant Residential Purpose”?

NHS Ayrshire and Arran Health Board

The Upper Tribunal considered whether the construction of accommodation within a secure mental health facility qualified for zero-rating under the rules for buildings intended for a relevant residential purpose.

The Health Board argued that the accommodation should qualify because patients lived there for extended periods and the building provided residential accommodation alongside medical care.

HMRC took the view that the primary purpose of the building was the delivery of healthcare rather than residential living. In HMRC’s opinion, the accommodation was incidental to the medical treatment being provided.

The Upper Tribunal agreed with HMRC and dismissed the appeal.

Why does this matter?

This decision is another reminder that VAT treatment depends on the purpose of the building, not simply on whether people sleep there.

Many organisations assume that because accommodation is provided, zero-rating automatically follows. Unfortunately, the legislation is far more restrictive.

Healthcare providers, charities, care organisations and developers should be particularly careful when planning new facilities, as relatively small differences in the intended use of a building can change the VAT treatment entirely.

Jane’s View

Property VAT is full of situations where common sense and VAT law don’t always align.

When clients tell me, “But people live there,” my response is always the same: that’s only the starting point.

Before assuming construction work qualifies for zero-rating, it’s essential to examine the statutory conditions in detail. A mistake at the planning stage can cost hundreds of thousands of pounds in irrecoverable VAT.

Are Clear Dental Aligners VAT Exempt?

Align Technology Switzerland GmbH

This case considered whether clear orthodontic aligners should be treated as VAT-exempt dental prostheses.

The taxpayer argued that the aligners should fall within the exemption because they are custom-made for individual patients and form part of dental treatment.

HMRC disagreed, arguing that aligners are not “dental prostheses” as intended by the legislation.

The Upper Tribunal agreed with HMRC and concluded that the aligners did not qualify for the exemption.

Why does this matter?

Although this case relates to orthodontics, its importance goes much wider.

Whenever VAT legislation contains narrowly defined exemptions, businesses should resist assuming that modern products automatically fit within categories created many years ago.

Medical technology evolves quickly. VAT legislation rarely keeps pace.

Jane’s View

Exemptions are interpreted strictly.

One of the biggest mistakes I see businesses make is assuming that because two products perform similar functions, they must receive the same VAT treatment.

That isn’t how VAT works.

Always analyse the legislation before assuming an exemption applies.

Can Alternative Evidence Replace a VAT Invoice?

Plat UK Ltd

Recovering input tax generally requires a valid VAT invoice.

In this case, the taxpayer argued that although some invoices were defective, sufficient alternative evidence existed to demonstrate that VAT had been incurred.

HMRC considered the evidence insufficient and refused the claim.

The First-tier Tribunal agreed with HMRC and dismissed the appeal.

Practical lesson

Many businesses believe that if they’ve genuinely paid VAT, recovery should follow automatically.

Unfortunately, that’s not always the case.

Documentation matters.

Without satisfactory evidence, even genuine business expenditure can result in input tax being denied.

Jane’s View

This is one of those cases that businesses can avoid entirely.

Simple bookkeeping procedures, supplier checks and regular invoice reviews are far cheaper than trying to persuade HMRC to accept alternative evidence several years later.

If an invoice is incorrect, ask for it to be corrected immediately.

Has an Economic Activity Really Ended?

Compound Photonics Ltd

This appeal considered whether a company that retained intellectual property after transferring its trading activities was still carrying on an economic activity for VAT purposes.

HMRC argued that the business activity had effectively ceased.

The taxpayer argued that the retained intellectual property remained part of an ongoing economic activity and that its eventual disposal should be viewed in that context.

The Tribunal examined the principles established in Wakefield College before reaching its decision.

Why does this matter?

Many corporate restructures involve businesses retaining assets after trading operations have been transferred elsewhere.

This case demonstrates that determining whether an economic activity has ceased is rarely straightforward.

Each situation depends on the facts.

Jane’s View

Whenever intellectual property, property portfolios or investment assets are retained following a restructuring, VAT should never be treated as an afterthought.

These transactions often look simple commercially but can become technically complex from a VAT perspective.

Taking advice before the restructure usually saves a great deal of time, and expense, later.

Error Correction Notices – Timing Still Matters

Next Generation Clubs Ltd

This appeal arose after HMRC rejected an Error Correction Notice (ECN) submitted by the taxpayer in relation to an earlier VAT period.

The Tribunal considered whether HMRC’s decision to reject the correction was correct in the circumstances.

Although Error Correction Notices are intended to provide a straightforward mechanism for correcting historic VAT errors, this case demonstrates that they are far from automatic.

The rules surrounding time limits, evidence and the nature of the original error remain critically important.

Practical lesson

If you discover an historic VAT error, don’t assume that simply submitting an ECN will resolve the issue.

Before making a correction, businesses should consider:

• whether the claim falls within the statutory time limits;
• whether sufficient evidence exists;
• whether the correction falls within the ECN procedure;
• whether a formal claim is required instead.

Jane’s View

I regularly see businesses delaying VAT corrections because they’re worried about approaching HMRC.

Ironically, delaying often makes matters worse.

The sooner an error is identified and reviewed, the more options are usually available.

Tribunal Round-up

Although these cases cover very different industries, they all reinforce three recurring themes.

Firstly, VAT is driven by legislation rather than commercial assumptions.

Secondly, evidence is just as important as technical analysis.

Finally, obtaining advice before a transaction or claim is made is almost always cheaper than resolving a dispute after HMRC has opened an enquiry.

As VAT advisers, our role is not simply to interpret legislation, it is to help clients avoid becoming the next Tribunal case.

Property VAT Spotlight

Capital Goods Scheme Reform – What Every Property Owner Needs to Know Before 29 July 2026

One of the most significant VAT changes this year is almost here.

From 29 July 2026, important changes to the Capital Goods Scheme (CGS) will come into force. While these changes may not grab national headlines, they will make a real difference to many businesses investing in commercial property.

For some, the changes will reduce administration considerably. For others, the Capital Goods Scheme will remain just as important as ever.

The key is understanding whether your project falls inside or outside the revised rules.

What is the Capital Goods Scheme?

The Capital Goods Scheme is designed to ensure that the amount of VAT recovered on certain high-value assets reflects how those assets are actually used over time.

When a business incurs significant expenditure on a qualifying property, it will usually recover VAT based on its intended use at the time the costs are incurred.

However, the use of a property can change.

For example:

• a fully taxable business may later make exempt supplies;
• a commercial building may become partly exempt;
• a mixed-use development may evolve over several years;
• a landlord may change the way a property is let.

Where this happens, the Capital Goods Scheme requires businesses to review the VAT recovered each year and, where appropriate, make adjustments over a ten-year period.

The principle is straightforward.

If your taxable use increases, you may recover more VAT.

If your exempt use increases, you may have to repay some VAT to HMRC.

What is changing?

HMRC has confirmed that, from 29 July 2026, the expenditure threshold for land, buildings and civil engineering works will increase from £250,000 to £600,000, excluding VAT.

This is a substantial increase.

Many refurbishment projects and smaller commercial developments that currently fall within the Capital Goods Scheme will no longer be caught by the rules.

HMRC has also confirmed that computers and computer equipment will be removed from the scheme from the same date, further reducing compliance for businesses.

Why has the threshold increased?

The original threshold has remained unchanged for many years.

During that time, construction costs have increased dramatically.

Projects that would once have been regarded as major capital investments have become relatively commonplace.

Increasing the threshold recognises this reality and should ensure that the Capital Goods Scheme focuses on genuinely significant property investments rather than capturing routine commercial projects.

Who benefits?

The biggest winners are likely to be businesses undertaking medium-sized property projects.

For example:

• landlords refurbishing commercial premises;
• businesses extending their own trading premises;
• charities constructing new facilities;
• developers carrying out smaller commercial conversions;
• companies investing in office accommodation.

Projects costing between £250,000 and £600,000 (excluding VAT) should no longer require annual Capital Goods Scheme monitoring once the new rules apply.

For many businesses, that removes ten years of record keeping and annual calculations.

Does this mean the Capital Goods Scheme is no longer important?

Absolutely not.

Large commercial developments, office buildings, industrial units, retail premises and substantial refurbishment projects will still fall within the scheme if the qualifying expenditure exceeds the new threshold.

Where significant amounts of VAT are involved, the annual adjustment process remains an important part of VAT compliance.

The change reduces the number of projects caught by the scheme, it does not remove the scheme altogether.

Why should property owners still pay attention?

The Capital Goods Scheme often becomes relevant years after a project has been completed.

A building that was originally used entirely for taxable business activities may later become partly exempt.

Perhaps part of the property is leased under different terms.

Perhaps a business diversifies into exempt activities.

Perhaps occupation changes following a restructuring.

These changes can affect the amount of VAT a business is entitled to retain.

Because the adjustment period lasts for ten years, today’s decisions can continue to affect VAT returns long into the future.

Example

Imagine a company constructs a commercial office building.

The qualifying expenditure is £1.2 million plus VAT.

At the time the building is completed, the company expects to use the entire property for taxable business activities and recovers all of the VAT incurred.

Three years later, part of the building is leased for an exempt purpose.

Without the Capital Goods Scheme, the original VAT recovery would remain unchanged.

However, because the property falls within the scheme, the business must review its VAT recovery and may be required to repay part of the VAT previously claimed.

Equally, if taxable use later increases again, further VAT may become recoverable.

The scheme works both ways.

Common mistakes I see

Although the rules themselves are technical, many of the problems I encounter are surprisingly simple.

Businesses often:

• fail to identify that a property falls within the Capital Goods Scheme;
• lose records of qualifying expenditure;
• forget to carry out annual reviews;
• overlook changes in property use;
• assume selling the property ends all VAT obligations;
• fail to consider the interaction with partial exemption;
• leave VAT until the project has almost completed.

Most disputes arise because the scheme has simply been forgotten.

My View

I welcome these changes.

The previous £250,000 threshold had become increasingly unrealistic given today’s construction costs.

Many perfectly ordinary commercial projects were being caught by rules that were originally intended for much larger investments.

Increasing the threshold to £600,000 should remove unnecessary administration for many businesses without undermining the purpose of the Capital Goods Scheme.

However, I would sound one note of caution.

The increase in the threshold should not encourage businesses to pay less attention to property VAT.

If anything, it makes it even more important to establish at the outset whether a project falls inside or outside the revised rules.

Getting that answer wrong can still be expensive.

Practical Action Points

If you are planning a property project, now is an excellent time to review your VAT position.

Ask yourself:

• Will qualifying expenditure exceed £600,000 (excluding VAT)?
• Will the property be used entirely for taxable business activities?
• Could any exempt use arise during the next ten years?
• Does partial exemption need to be considered?
• Will the property remain within the same legal entity?
• Are adequate records being retained from the outset?

If you cannot confidently answer these questions, it is worth seeking specialist VAT advice before contracts are signed or construction begins.

Final Thoughts

The changes taking effect on 29 July 2026 represent a welcome simplification of the Capital Goods Scheme.

Many businesses will benefit from reduced compliance, but the scheme continues to play an important role for larger property investments.

As with most areas of property VAT, the greatest savings rarely come from completing the annual calculations correctly.

They come from understanding the rules before the project starts.

A little planning at the beginning can prevent a very expensive VAT problem years later.

Accountants’ VAT Club

You Don’t Have to Be a VAT Specialist to Give Excellent VAT Advice

As an accountant, you’ll probably come across VAT questions every week.

Some are straightforward.

Others can have significant financial consequences if they’re answered incorrectly.

The challenge is knowing where to draw the line.

Property transactions, international supplies, partial exemption, charities, land developments, Options to Tax and the Capital Goods Scheme are just a few examples where seemingly small details can completely change the VAT position.

The good news is that you don’t need to become a VAT specialist yourself.

That’s exactly why I created the Accountants’ VAT Club.

The Club is designed to give accountancy firms direct access to specialist VAT support whenever they need it. Whether you simply need reassurance that you’re on the right track or help with a particularly complex matter, we’re here to support you.

Membership includes practical VAT updates, technical guidance, access to specialist advice and regular training designed specifically for accountants in practice.

The aim is simple: to help you identify VAT risks early, provide greater value to your clients and give you confidence when dealing with complex VAT issues.

Many accountants tell me that having a VAT specialist available is like having an experienced member of the team they can call upon whenever needed—without the cost of employing one.

If your firm regularly advises businesses, landlords, property developers, charities or owner-managed companies, the Accountants’ VAT Club could quickly become one of your most valuable professional resources.

If you’d like to find out more about membership or discuss which level of support would best suit your practice, I’d be delighted to have a chat.

Together, we can make complex VAT simple.

Ask for a brochure or a meeting to discuss.

Closing Remarks

Thank you for reading this week’s edition of the Deeks VAT Newsletter.

This week has demonstrated once again that VAT is constantly evolving. From the forthcoming changes to the Capital Goods Scheme to the latest Tribunal decisions, there is always something new to consider.

While legislative changes are important, the biggest difference usually comes from applying the rules correctly in practice. A little planning before a transaction takes place is often worth far more than trying to resolve a VAT problem after HMRC has become involved.

I hope you’ve found this edition informative and, more importantly, practical. My goal is that every newsletter gives you something you can apply immediately in your business or with your clients.

If there’s a VAT topic you’d like me to cover in a future edition, or if you’ve encountered a particularly interesting VAT issue, I’d love to hear from you.

Until next week, thank you for your continued support.