20 Jan VAT Claw Back
When can HMRC claw back VAT you’ve reclaimed?
VAT on purchases
Generally a registered business is allowed to reclaim the VAT it pays on purchases as long as whatever is bought is intended for use in the business. If the purchase is partly going to be used for non-business or exempt purposes a proportionate amount of the VAT can’t be reclaimed. So far so good. But what’s the position if you make a purchase intending it for business use and then later decide to use it for an exempt purpose, or vice versa?
Example. Acom Ltd is a general builder which also buys and develops property. It buys a plot of vacant land with a view to build on it. It incurs expenses clearing the site on which it pays and reclaims VAT. It also pays various professionals to help it obtain planning permission. Unfortunately, Acom is hit by financial trouble and it decides to sell the undeveloped land to raise cash as quickly as possible. Because its intended purpose for the land has changed from a VATable supply to an exempt one, it must adjust its VAT records.
Acom must repay all the VAT it reclaimed on purchases related to developing the land on its VAT return for the quarter that it changed the intended use of the property. However, this doesn’t always apply.
Tip. Where more than six years have passed between the original purchase and the change of intention, no adjustment in required.
Trap. Certain types of purchase, essentially land, buildings that cost more than £250,000 and computer equipment costing more than £50,000, are caught by the so-called capital goods scheme (CGS) . These can also cause a claw back of VAT, but only where there’s an actual rather than an intended change of use of an asset within ten years of purchase. As VAT can only be clawed back once, special rules apply to work out VAT adjustments where there’s been a change of intention adjustment and the CGS applies.
The change of intention rules also work the other way around. For example, say you bought an asset but didn’t reclaim VAT because you intended to use it for exempt supplies. You didn’t use it at all. Within six years your intention changes and you use it for VATable supplies. You would be entitled to reclaim any VAT incurred in relation to the asset. Note. The usual four-year time limit on reclaiming VAT doesn’t apply.
Intended v actual use
Just to be clear, an adjustment for change of intended use is only required where you have not made supplies using the asset. So if Acom had allowed a burger van to park its trailer and conduct business from its plot of land during the period that it was looking for a buyer, it would have made a VATable supply. Therefore, no VAT adjustment would be needed when Acom changed its intention and decided to sell the land.
Tip. If faced with a clawback because of a change of intended use, consider if there’s a VATable supply you can make using the asset. The intended-use clawback won’t then apply.