VAT – Payback and Clawback Rules: What Happens If There Is a Change of Plan?
VAT applies to taxable supplies made by a VAT-registered individual or company. VAT-exempt supplies, on the other hand, are not subject to VAT at any rate, including the standard rate (20%), reduced rate (5%), or zero rate (0%). Businesses making only VAT-exempt supplies do not charge VAT on their sales and usually cannot reclaim VAT on their purchases.
Many business owners may not realise that if they claim input tax based on an intention to make future taxable supplies, this claim may need to be reduced or repaid if there is a change in the business to exempt or partially exempt supplies or if the item is taken out of the business for private use.
When Plans Change
This situation often arises when developers are unable to sell properties and must let them out instead. VAT on lettings is exempt, so none of the VAT paid can be reclaimed, as the builders are now deemed to be operating as investors rather than developers. If VAT has already been reclaimed, it must be repaid to HMRC, known as ‘clawback’.
Example:
If VAT was reclaimed on a land purchase intended for building and selling houses (zero-rated sales), and the houses are then let instead of sold, rental income is exempt from VAT. Consequently, the input tax claimed on the land purchase and other expenses, such as building materials from the previous six years, must be repaid to HMRC in the VAT period when the change in intention occurs.
Short-Term Rentals
Not all VAT may need to be repaid if the rental arrangement is short-term. Adjustments can be made based on the ten-year life of the property. For instance, if a property is rented out for two years, only 20% of the input tax claimed on the project costs needs to be repaid (subject to de minimis limits).
Payback Rules
The ‘payback’ rules apply when an expense initially intended for exempt purposes (with no input tax claimed) becomes relevant to a taxable activity due to a change in business plans. In this case, input tax not previously claimed within the last six years can be claimed in the VAT period when the change in intention occurs.
Private or Non-Business Use
The clawback rules also apply when a business asset is repurposed for private or non-business use. For example, if a VAT-registered business reclaims VAT on a computer purchase but later uses the computer for private purposes, the input tax claimed must be repaid under the clawback provisions.
Practical Points
Input tax adjustments under the payback and clawback rules may still be claimable under the partial exemption de minimis rules. These rules allow a claim on input tax on exempt supplies if the amount is less than £625 a month on average and not more than 50% of the total input tax in the relevant period.
Need Help Navigating VAT Changes?
Understanding the payback and clawback rules for VAT can be complex, especially when business plans change. Contact Jon and the team at Jon Davies Accountants for expert advice tailored to your situation. We’re here to help you navigate these rules and ensure compliance.
If you found this useful, please share it using the icons at the side of the page, or leave a comment below.
Any questions?
If you’d like a meeting or a video call to discuss this, please get in touch with your favourite Liverpool accountant
- You can ring us on 0151 380 8080
- You can email us at gr****@*********************co.uk