For most costs, VAT recovery is a one-off event: you pay the VAT, you reclaim what you are entitled to under partial exemption, and that is the end of it. Large capital spend is different. When a partially exempt dental practice spends heavily on its premises, the VAT recovery is not settled once and forgotten. The Capital Goods Scheme (CGS) keeps revisiting it for ten years, adjusting the recovery up or down as the practice's mix of exempt and taxable work changes. A practice that recovered VAT on a cosmetic-heavy fit-out at a high rate and then drifted back to mostly-NHS work can find itself repaying VAT years later. A practice that grew its cosmetic side can reclaim more. Either way, year-one recovery is not the final word.
This page is the long-run sequel to the annual recovery question. Our guide to recovering input VAT in a mixed dental practice handles the year-by-year partial-exemption mechanics; this one handles the multi-year capital item that sits on top of them. The dental context is the same throughout: dental care is exempt under VATA 1994 Schedule 9 Group 7, so a practice with any taxable cosmetic or retail income is partially exempt, and a large fit-out by such a practice is exactly what the Capital Goods Scheme is built to catch.
Why a one-off VAT recovery is not the end of the story for big spend
When a partially exempt practice spends on its premises, the VAT on that spend is recovered at year one using the ordinary partial-exemption percentage. If 20% of the practice's use is taxable that year, it recovers 20% of the fit-out VAT. So far this is just partial exemption applied to a big number.
The Capital Goods Scheme adds a second layer. It says: a capital item this large will be used by the business for years, and the exempt-to-taxable mix will change over those years, so it is unfair to lock the recovery to the single snapshot of year one. Instead, the scheme revisits the recovery each year for ten years, comparing each year's taxable use to the year-one baseline and adjusting the VAT accordingly. The effect is that the practice's recovery on the capital item tracks its real, evolving use rather than freezing on the day the bill was paid.
What the CGS catches: the £250,000 threshold
The scheme applies to defined categories of capital expenditure above a value threshold. For a dental practice the relevant category is land, buildings and refurbishment, and the threshold is £250,000 or more, VAT-exclusive. That covers:
- the purchase of land or a building (or part of a building);
- civil engineering works; and
- refurbishment, fit-out, extension or alteration works to a building.
There is a separate, lower £50,000 VAT-exclusive threshold for individual computers, ships and aircraft, with a shorter adjustment period. That threshold is rarely reached by a single qualifying item in a dental practice, so in practice the £250,000 land-and-buildings threshold is the one that matters. Below £250,000, the Capital Goods Scheme does not apply at all, and the spend is dealt with under ordinary partial exemption only.
What "refurbishment" means here
The trigger most dental owners do not see coming is that a refurbishment or fit-out is a Capital Goods Scheme item even when no land or building changes hands. A practice that already owns or leases its premises and spends £250,000 or more (excluding VAT) on a major surgery rebuild, a new floor of treatment rooms, or a substantial reconfiguration has created a CGS item just as surely as if it had bought a freehold.
This matters because the mental model many owners carry is "the Capital Goods Scheme is for property purchases". It is not. A squat build-out or a big refurbishment of existing premises is squarely within it. A squat practice fit-out is a textbook example: the kind of ground-up build that easily exceeds £250,000 and that we cover from the commercial angle in our guide to a squat versus existing practice purchase.
The adjustment period: 10 intervals for land and buildings
For land, buildings and refurbishments, the adjustment period is 10 intervals, roughly ten years (each interval is normally a VAT year). For the £50,000 computer category it is 5 intervals. Across those ten intervals the practice monitors the item and adjusts the recovery year by year.
The first interval is special: it fixes the baseline. Each of the nine later intervals is compared back to that baseline. So a land or building item bought or refurbished today is on the books, for VAT-adjustment purposes, for the best part of a decade. That long tail is why the record-keeping point later on this page is not a footnote: the practice has to be able to support adjustments it makes nine years after the original spend.
The baseline and the adjustment percentage
Interval one fixes the baseline recovery: the partial-exemption recovery percentage for that first year. That percentage represents the taxable use of the item at the outset, and it is the number every later interval is measured against.
In each later interval, you take that year's taxable-use percentage (which comes straight from that year's partial-exemption calculation) and compare it to the baseline. The difference is the adjustment percentage. If taxable use has risen above the baseline, the adjustment is positive (more recovery due). If it has fallen below the baseline, the adjustment is negative (a clawback). If it is unchanged, there is no adjustment for that interval.
The adjustment formula, in plain numbers
The formula for each interval's adjustment is:
Adjustment = (total input VAT on the item ÷ number of intervals) × adjustment percentage
The first part, total input VAT divided by the number of intervals, gives the slice of VAT attributable to a single interval. The second part, the adjustment percentage, is the percentage-point change in taxable use from the baseline. Multiply them and you get the VAT to reclaim (if positive) or repay (if negative) for that interval. Let us run the brief's three intervals through it.
Worked example A, a £300,000 fit-out enters the CGS (£250,000 threshold, 10 intervals, 2025/26). A practice spends £300,000 (VAT-exclusive) refurbishing into a mixed NHS and cosmetic site, incurring VAT of £60,000. Because the spend exceeds £250,000, it is a CGS item over 10 intervals. The interval slice is £60,000 ÷ 10 = £6,000 per interval. At interval one the partial-exemption recovery is 20% taxable use, so the practice recovers 20% of £60,000 = £12,000, and 20% becomes the baseline.
Worked example B, a clawback when the NHS share rises (CGS formula). By interval four, cosmetic income has shrunk and taxable use is only 10%. The adjustment percentage is 10% minus the 20% baseline = minus 10 percentage points. Adjustment = £6,000 (interval slice) × (minus 10%) = minus £600. The practice repays £600 to HMRC for interval four, because the item is being used more for exempt work than the baseline assumed.
Worked example C, a refund when cosmetic grows (CGS formula). By interval seven the practice has built a busy implant and cosmetic suite and taxable use is 40%. The adjustment percentage is 40% minus the 20% baseline = plus 20 percentage points. Adjustment = £6,000 × (plus 20%) = plus £1,200, reclaimable from HMRC for interval seven, because the item is now being used more for taxable work than the baseline assumed.
The arithmetic is the same each time: take the £6,000 interval slice, multiply by the percentage-point change from the 20% baseline, and the sign tells you whether you reclaim or repay. The scheme cuts both ways.
It is worth stepping back to see what this means across the whole decade. The £60,000 of VAT on the fit-out is, in effect, parcelled into ten £6,000 slices, one per interval. Year one's slice is recovered at the 20% baseline. Each of the other nine slices is recovered at whatever the taxable use turns out to be in that year. So the practice's ultimate, total recovery on the fit-out is not the £12,000 it banked at the start; it is the sum of ten annual recoveries, each reflecting that year's real use. If taxable use averages 20% across the decade, the practice ends up roughly where it started. If it averages below 20%, the net effect of all the interval adjustments is a clawback; if it averages above 20%, a net refund. Year-one recovery is best understood as a provisional down payment that the next nine years progressively correct.
One consequence of seeing it this way is that the interval adjustments are individually small but cumulatively meaningful. A single interval clawback of £600 is easy to dismiss; six of them across a decade, plus the year-one over-recovery they are unwinding, is a four-figure cash effect that a practice should anticipate rather than absorb as a series of nasty surprises on random VAT returns.
Why dental practices usually face a clawback, not a refund
In the dental sector the typical drift is towards a clawback rather than a refund, for a structural reason. Practices often fit out a new or refurbished site with an ambitious private and cosmetic offering, which gives a relatively high taxable-use percentage in year one and therefore a healthy baseline recovery. Over the following years, for all sorts of reasons (a cosmetic line that does not take off, a return to NHS-weighted work, a change of clinical focus), the taxable share frequently falls back. A falling taxable use against a high baseline produces clawbacks interval after interval.
The opposite path, a genuine and sustained shift towards more cosmetic and private work over the decade, produces refunds, as Example C shows. But the asymmetry of how dental sites are commonly fitted out (optimistic taxable mix at the start, more exempt-weighted reality later) means the clawback case is the one to plan for. Modelling the likely interval adjustments at the point of the fit-out, rather than being surprised by an assessment in interval four, is the whole value of understanding the scheme early.
The interaction with partial exemption
The Capital Goods Scheme does not replace partial exemption; it sits on top of it. Two linkages are worth stating plainly. First, the interval-one baseline is the partial-exemption recovery percentage for that year, the very number produced by the annual partial-exemption calculation. Second, each later interval's taxable-use percentage comes from that year's longer-period partial-exemption calculation, the annual adjustment figure.
So the workflow is: run partial exemption as normal every year, including the annual adjustment, and use the recovery percentage it produces as the taxable-use figure for that interval's CGS calculation. The two systems share the same underlying number. If you have not got the ordinary partial-exemption calculation right, the Capital Goods Scheme adjustment built on it will be wrong too. The detail of that underlying calculation, the three-bucket split, the de minimis test and the annual adjustment, is in our input-VAT recovery guide.
For a multi-site group, the same logic applies but the partial-exemption percentage is calculated at group level, and the CGS sits over the group's capital spend. That added complexity is covered in our guide to partial exemption and cost-sharing for a multi-site dental group.
Selling, closing or deregistering mid-period
The ten-year clock does not stop just because the practice changes hands or stops trading. A sale of the practice (or the asset) during the adjustment period triggers a final adjustment for the remaining intervals, with the asset treated as having a deemed taxable or exempt use for the rest of the period, depending on the nature of the sale. The recovery for those remaining intervals is settled in one go. A practice sale therefore carries a Capital Goods Scheme consequence that should be modelled before completion, because it can crystallise a repayment or a reclaim that nobody factored into the price.
A move to wholly exempt use or deregistration mid-period likewise triggers a final adjustment. A practice that drops its cosmetic work to go fully NHS-exempt and deregisters can face a clawback on the remaining intervals of a recently recovered fit-out, on top of the deemed supply on its other retained assets. This is one of several reasons that deregistration is a planning exercise rather than a form-filling one; the full treatment, including the deemed-supply charge and the deregistration threshold, is in our guide to VAT deregistration for a mostly-NHS practice.
Opting to tax the property, and the buy-versus-lease angle
Where a practice buys a freehold or long lease and the seller has opted to tax the property, VAT is charged on the purchase price. That brings a large block of input VAT into play, and if the VAT-exclusive value is £250,000 or more, the property is a Capital Goods Scheme item from the outset. The recovery on that VAT then runs through the ten-interval adjustment like any other CGS item.
This gives the buy-versus-lease decision a VAT dimension that is easy to overlook. An opted freehold purchase pulls the property into the Capital Goods Scheme; a lease may not, depending on its terms. We keep this point light here because the lease-versus-buy decision turns on much more than VAT, but it is a real input into that choice, and our lease versus buy decision framework is where the wider comparison lives.
There is one further wrinkle that frequently arises on a practice property purchase, and it is worth flagging because it surprises people. Where a property is sold as part of the sale of a practice as a going concern, the transfer can sometimes be treated as a transfer of a going concern, which is outside the scope of VAT, so no VAT is charged on the property even where it was opted to tax (provided the conditions are met and the buyer makes the right elections). That does not make the Capital Goods Scheme go away. If the property was already a CGS item in the seller's hands, the buyer can step into the remaining intervals and inherit the adjustment obligation for the rest of the period. A buyer who assumes that no VAT on the purchase means no CGS exposure can be caught out by inheriting a clawback profile on someone else's recently recovered spend. This is precisely the kind of point that needs checking in due diligence on any practice purchase involving recently refurbished or recently acquired premises, because the CGS history transfers with the building.
Records you must keep for 10+ years
The Capital Goods Scheme record has to outlive ordinary VAT records. For each CGS item you must keep the cost, the input VAT incurred, the baseline (interval-one) recovery percentage, and each interval's adjustment calculation, for the whole adjustment period and the normal retention period after it. For a land or building item that means holding the records for well over a decade.
This is a genuine and avoidable trap. Practices change accountants, change software, and move premises across a ten-year span, and the original CGS workings can get lost. Without them, the practice cannot support its later-interval adjustments if HMRC reviews them, and cannot calculate the final adjustment on a sale or deregistration. Treat the CGS record as a permanent file for the life of the asset, separate from the year's routine VAT papers.
How the CGS and capital allowances differ on the same spend
It is worth being explicit that the same refurbishment can trigger two completely separate tax mechanisms that are often confused. Capital allowances give income-tax or corporation-tax relief on the cost of qualifying plant, machinery and integral features in the fit-out. The Capital Goods Scheme adjusts the VAT recovery on the spend. They run on different tax systems, use different thresholds, and are calculated independently. A £300,000 fit-out can attract capital allowances on its qualifying plant and integral features and be a Capital Goods Scheme item for VAT. Treating them as one thing, or assuming that dealing with one disposes of the other, is a common and expensive misunderstanding.
Common errors
- Assuming year-one recovery is final. For a £250,000-plus capital item it is only the baseline; the recovery is revisited for ten years.
- Missing that a £250,000-plus fit-out is a CGS item with no land involved. A major refurbishment of premises you already occupy is within the scheme.
- Forgetting the interval adjustments and getting a surprise assessment in a later interval when the taxable mix has shifted.
- Ignoring the final adjustment on sale or deregistration, which can crystallise a clawback nobody priced into the deal.
- Losing the CGS record over the long adjustment period, leaving the practice unable to support its adjustments.
One anonymised illustration of the value of getting ahead of this: a practice that recovered VAT on a £300,000 cosmetic fit-out at a high taxable rate, then drifted back to mostly-NHS work, faced exactly the clawback profile in Example B. Because the interval adjustments had been modelled at the time of the fit-out, the repayments were anticipated, budgeted and made on time, and there was no surprise assessment. The Capital Goods Scheme is not a problem to be feared; it is a ten-year calculation to be planned for, and the practices that plan for it at the point of spend are the ones that never get caught out by it.