Change of use ― payback and clawback

This guidance note provides an overview of the correct procedure to deal with situations where the intended use of goods or services changes.

The payback and clawback provisions may apply in situations where:

• •a business recovers (or does not recover) VAT on costs it incurs based on its intended use of those costs; and
• •the intended / actual use changes before the original intention is fulfilled

SI 1995/2518, regs 108–110; HMRC Notice 706 ; 2006/112/EC, Chapter 5, Articles 184–192 ; PE61000

For example, a largely exempt business might purchase property and recover VAT incurred on the basis that it intends to let out the property on a taxable basis. However, it may change its intention before letting out the property and decide to use it in its exempt business. As a consequence, the VAT originally reclaimed may be ‘clawed back’ by HMRC.

The provisions will not apply where the change of intention / use occurs in the same longer period as the one in which the VAT is incurred as adjustments to VAT recovery should be taken care of under the annual (or longer period) adjustment. For details, see the Annual adjustments (longer period adjustments) guidance note.

It should be noted that the clawback and payback provisions will also not apply in situations where there has been a change in the VAT law that results in a change in the liability of the supply.