In business, things don’t always go to plan. That’s why HMRC has rules in place to deal with situations where your VAT reclaim doesn’t match up with how things eventually turn out.
These are known as the ‘payback and clawback rules’. They apply when VAT has already been claimed, refunded, or recovered, but the way an asset or service is used changes — meaning an adjustment is needed.
Let’s break down what this means in practice.
The ‘Payback’ Rule
Payback applies when you can reclaim more VAT than you originally claimed, because your intended use of something changes.
Example: A business buys office equipment worth £1,200 (including VAT), intending to use it 50% for business and 50% personally. They initially reclaim £100 VAT.
Later, they switch to 70% business use. This means they can reclaim an extra £40 in input tax. This top-up claim is known as ‘payback’.
The ‘Clawback’ Rule
Clawback works in the opposite direction — when HMRC requires you to repay VAT you’ve already reclaimed, because your plans changed.
Example: A developer builds a house, intending to sell it (a zero-rated taxable supply), and claims VAT on project costs. But if they later decide to rent it out long-term, that income is exempt from VAT.
In this case, HMRC will ask for the VAT to be repaid, as the original claim was based on an intention that didn’t happen.
Clawback is usually a one-off adjustment — unless the property is never rented out, in which case further changes may be needed.
Mixed-Use Situations
Sometimes, a change of intention leads to mixed use — part taxable, part exempt. In this case, the input tax becomes residual input tax under the partial exemption rules.
This means VAT must be apportioned between the taxable and exempt use, with only part of the input VAT recoverable.
Temporary Changes
What if the change of intention is only temporary?
- Only a proportion of VAT needs to be repaid, based on a 10-year lifespan for the property.
- No clawback is required if the repayable amount averages less than £625 per month and is under 50% of the total input VAT.
Case Law Example
The importance of intention was highlighted in the case of Briararch Ltd and Curtis Henderson Ltd [1992].
The business built a property intending to sell it (a zero-rated supply) and reclaimed VAT in full. But due to a downturn in the property market, they had to let it instead.
HMRC tried to claw back all the VAT, but the High Court ruled that because the company still intended to sell in the future, only a proportionate adjustment was required.
Practical Point
If a change of intention occurs after year-end but within six years of the tax quarter when the VAT was originally reclaimed, the adjustment is made in the quarter when the change happens.
Importantly, the original deduction stands, as it was correct based on the intention at the time of claim.
Final Thoughts
VAT rules on payback and clawback can be tricky, but they’re built around one key principle: intention matters. If your business circumstances change, it’s vital to review your VAT reclaim to avoid unexpected repayments (or missing out on extra claims).
Need Help with VAT Adjustments?
At Jon Davies Accountants, we make VAT simple. Whether it’s payback, clawback, or partial exemption, we’ll guide you through the rules and make sure you stay compliant.
Contact Jon and the team today to check your VAT position and avoid surprises.
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