Partial exemption ― payback and clawback

Produced by a Tolley Value Added Tax expert

Value Added Tax

Guidance

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:

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

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