Q- My client is a housing developer and bought some land in August 2016 on which he incurred VAT. At the time of purchase, he intended to build new dwellings for sale (zero-rated taxable supplies) and therefore he claimed back the VAT incurred on the October 2016 return. However, upon completion of the site in January 2018 the developer changed his mind, and now, for the first time, he intends to rent 50% of the properties out (exempt). What happens to the VAT he has claimed?
A- Input tax can be reclaimed on goods or services where they are used, or intended to be used to make taxable supplies.
As your client intended only to make taxable supplies with the land, he was correct to claim back the input tax in full at the time.Had your client changed his intention within the same partial exemption year as the claim for input tax (i.e. by April 2017), then any input tax claim would have been adjusted under normal partial exemption annual adjustment rules.However, because your client’s intention changed after the tax year in which input tax was incurred but within six years, the “clawback” rules apply.
Under “clawback”, your client is required to calculate the amount of over-claimed input tax, and declare this on the January 2018 return (the return where the intention changed).
If your client used a partial exemption method to calculate his original recoverable input tax then he must use the same method for calculating the amount of over-claimed input tax. However, your client was not required to use a partial exemption method, because his intended use of the land was fully taxable, and he had no other exempt supplies.
HMRC allow in these circumstances for your client to use an alternative calculation as long as the calculation is fair or to use the standard method.
More information on changes in intention and the “clawback” and “payback” rules can be found in VAT Notice 706 Section 13 and HMRC’s Partial Exemption Guidance.