New announcement. Learn more

CHARTERED ACCOUNTANTS (ICAEW)

News and advice to help make your property business a success

Landlords TaxProperty TaxLandlords Tax ReturnsLandlords AccountsProperty Tax ReturnProperty AccountsLandlords FinancialTax ReturnsTaxLandlords AccountantChartered AccountantsOnline AccountantOnline BookkeepingOnline Tax ReturnsYour Online AccountantYour Online BookkeeperBusinessadviceAccountingVATCashflowProperty AccountantSmallbusinessBusinesstipsCapital Gains TaxDividendsExpensesIhtexemptionsInheritance TaxPropertySDLTTaxplanningCgtFurnished Holiday LettingsHMRCIncome TaxInvestment Property TaxNICPAYEPensionProperty bookkeeperTaxreturnAllowable Business ExpensesAnnual Exempt AmountBusiness ExpensesBusiness RateCapital AllowancesCapital GainsCapital gains tax propertyCashbasisComplianceDeductibleexpensesDisincorporationEmployment AllowanceFHLsFinanceFinancialmanagementGiftsHMRC complaintsHoliday Lets TaxLettingsMaking Tax DigitalMakingTaxDigitalMileage AllowanceMobilephonesNational InsuranceOverlapreliefPartnershipPartnershipbusinessesPprProperty Company TaxProperty Tax Deductible ExpensesPropertyallowanceReimbursedexpensesRent a Room ReliefResidence ReliefSmall BusinessTax free incomeTax ReliefTimetoPayVAT invoice60 day capital gains limitAbolitionclass2AccrualsbasisAcquisitionsAdvisoryfuelratesAIAirBnBAlphabet sharesAmapAnnual Tax on Enveloped DwellingsAppealArtificial intelligenceAssessmentAsset disposalAssociated CompanyAssociated Company Tax RulesAutumnstatementBad DebtBad Debt Tax ReliefBaddebtsBadgesoftradeBeancounterBenefits in KindBreakeven PointBudgetBusiness adviceBusiness asset defermentBusiness coachBusiness ContinuityBusiness EntertainmentBusiness RatesBusiness Rates ReliefBusiness tipsBusinessgrowthBusinesstypesBuy or Lease EquipmentBuytoletCapital Allowances for CarsCapital GainCapitalallowancesCapitalexpenditureCar Capital AllowancesCarry Back LossesChange of Tax BasisChatGPTChild BenefitCIS SchemeCommon TenantCompanies ExpenditureCompanies HouseCompany Account DeadlinesCompany Account FilingCompany Strike OffCompany Tax Efficient PropertyCompanyassociationCompanyloanstaxfreeCompulsory Strike OffConstruction Industry SchemeContacthmrcContentmarketingContributionsCorporation Tax LossesCorporation Tax New RegimeCorporation Tax RatesCorporationTaxCostsCryptocurrencyCustomerlistimplicationsDeductible Business ExpensesDeductionsDemergerDepreciationDevelopmentDirectorsDirectors LoansDirectorsloansDisallowable Business ExpensesDiscoveryDividend allowanceDividend Allowance ReductionDividend PlanningDividendallowanceDLADomestic Items Tax ReliefDormantcompanyEISEmployee DiscountEmployee managementEmployeecompensationpaymentsEmployeeOwnershipTrustEndoflifeplanningEnquiryEnterpriseResourcePlanningEntertainmentEntrepreneurmindsetEquityExpenses Allowed For TaxExtrabenefitEyetestsFlippingFurnished Holiday Lets TaxGift AidGift AllowanceGrowthhacksHelp to pay tax billsHICBCHMO Licensing FeesHoldoverreliefHoliday Lettings TaxHow to apply for a Business LoanHow to Extract ProfitHumourHybridIllegaldividendsIncomeInflationary GainsInfluencersInheritance Tax Nil Rate BandInterest RatesInterestreliefInterestrestrictionISAJoint TenantKeypersoninsuranceLandlord RepairsLandlords Self AssessmentLate vat registrationLBTTLeadgenerationLeadmagnetLeanbusinessmodelLetting Agent DisbursementsLetting Agent RecharresLettings ReliefLimitedcompanyLiquidation DemergerLoaninterestLong Lets TaxLongserviceLTTMainresidencereliefManaged LetsManagement accountingMaritalhomedivorceMarriage allowanceMarriageallowanceMileage paymentMinimumwageMixedusesdltMortgage costsMortgage Interest ReliefNew propertyNewcompanycarfuelratesNewnicrulesNIC 2023 to 2024NIC savingsNicdisregardNicreductionNMWNmwerrorsNon Allowable Business ExpensesNon-taxableNudgeletterOptiontotaxvatOverpayment ReliefPaperformParttimePatternofoccupancyPAYE by Direct DebitPayrollingPenaltypointsPension Payments Tax ReliefPensioncontributionsPensionsPerformance-reviewsPeriodofgracePeriodsofabsencePersonal ExpensesPersonal financePersonalallowancePersonalguaranteesPostcessationreliefPretradingexpensesProfitProfit-and-lossProfitAndLossProperty AllowanceProperty Development CompanyProperty IncorporationProperty Investment CompanyProperty investor accountsProperty investor tax tipsProperty LettingProperty Rental BusinessProperty TradingPropertycompanyRecharges by Estate AgentsRegularpaymentsReliefRent your driveRentalRentaroomResearch & DevolopmentResidential property gainsResidentialsdltRetail stock controlRetainedprofitsRevenueRoom for rent taxRtiSASalarySavingsSDLT changesSection 455 TaxSection455taxSelective Licences LandlordsSelf AssessmentSelf-employednicSelfemployedSelling OnlineSeperationServicechargesSettlementslegislationSimplified ExpensesSmallbizSmallbusinessratereliefSoftwareSole TraderSpring BudgetStaffpartiesStamp dutySuccessJourneyTax Allowance on DrivewaysTax AllowancesTax BreakTax CodesTax DeadlinesTax DeductionsTax Filing DeadlinesTax Free ChildcareTax on Company VansTax positionTax tips for landlordsTaxbillpaymentsTaxconsequencesTaxincentivesTaxpositionTaxpositionassetsTaxreliefTaxreliefsTaxsesTerminationpaymentsTipsTrade professionalTrainingTransfer AssetsTransfer Assets Between SpousesUmbrellacompanyUndisclosedincomeUnpaid RentVAT Bad Debt ReliefVAT DeadlinesVAT DisbursementsVAT PenaltiesVAT registrationVAT Reverse ChargeVatpenaltiesVatregisteredVatregistrationthresholdWellbeingWorking from home
TAGS

VAT – payback and clawback rules – what happens if there is a change of plan?

VAT applies to taxable supplies made by a VAT-registered person whether an individual or a company. VAT-exempt supplies in the UK are goods and services that 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 cannot usually reclaim VAT on their purchases.

Many business owners are unaware 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 a taxpayer’s business to exempt or partial exempt or if the item is taken out of the business for private use. This situation typically arises where developers have been unable to sell but have had to let out the property instead. VAT on lettings is exempt, therefore in this situation none of the VAT paid can be reclaimed as the builders are deemed to be operating as investors rather than developers. If VAT has already been reclaimed, that amount must be repaid to HMRC ('clawback'). For example, the VAT charged on land purchase can be reclaimed if the intention was to build and sell houses, i.e. generating zero-rated sales. If the houses are built but then let rather than sold, rental income is exempt from VAT, so the input tax claimed on the land purchase, plus input tax on all other expenses, such as building materials claimed in the previous six years, must be repaid to HMRC in the VAT period when the change in intention takes place.

However, not all of the VAT may need to be repaid if the rental arrangement is short-term. There is scope to make a clawback adjustment based on the ten-year life of the property. For example, if the rental agreement was for two years, then only 20% of the input tax claimed on the project costs needs to be repaid (subject to de minimis limits).

The 'payback' rules work the other way round – where an expense was intended for exempt purposes (so input tax was not claimed), but a taxpayer’s business plans change such that it becomes relevant to a taxable activity (so input tax can be claimed). In this instance, input tax not previously claimed in the previous six years can be claimed in the VAT period when the change in intention takes place.

The clawback rules also apply to any change in intention from a business purpose to a private or non-business purpose. For example, VAT is reclaimed at the standard rate on the purchase of a computer by a VAT-registered business but then taken out of the business for private use. In this case, the input tax claimed should usually be repaid under the clawback provisions.

Practical point

Any input tax that needs to be adjusted under the payback and clawback rules may still be claimable in many cases under the partial exemption de minimis rules. Such 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.