Partial exemption ― payback and clawback

Produced by Tolley

The following Value Added Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Partial exemption ― payback and clawback
  • Payback and clawback ― the basics
  • Clawback
  • When do I need to make a clawback adjustment?
  • How do I calculate my clawback adjustment?
  • When do I declare my clawback adjustment?
  • Payback
  • When do I need to make a payback adjustment?
  • How do I calculate my payback adjustment?
  • When do I declare my payback adjustment?
  • More...

Partial exemption ― payback and clawback

This guidance note provides an overview of the VAT payback and clawback rules. These rules can apply where there are changes in intended use of costs prior to their first use.

For an overview of partial exemption more broadly, see the Partial exemption ― overview guidance note.

For in-depth commentary on the legislation and case law, see De Voil Indirect Tax Service V3.467.

Payback and clawback ― the basics

The payback and clawback provisions broadly apply in circumstances where:

  1. a business recovers (or does not recover) VAT on costs it incurs based on its intended use of those costs

  2. the intended / actual use changes before the original intention is fulfilled

SI 1995/2518, regs 108–110; Notice 706, para 13.1

The provisions require adjustments to input tax recovery to be made to reflect the change in intention as to how the costs are to be used.

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.

Similarly, a taxable business might initially intend to rent out some commercial property on an exempt basis and recover no input tax. However, this intention may subsequently change and it may instead use the building in its own taxable business. Consequently, HMRC may need to ‘pay back’ input tax which was not recovered by the business.

It is worth noting that the provisions will not apply where the change of intention / use occurs in

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