Change from intended use of a business asset

Buying an asset

If your business buys goods or services with the intention to use them for one purpose, but that intention changes before the asset is actually used, any VAT recovered may need to be repaid when this happens.

Example. Company A buys a piece land that the seller has opted to tax - so charges VAT on the sale. Company A intends to build houses on the site and sell them, creating a zero-rated taxable supply. As a result of this Company A recovers the VAT charged on the purchase. It then obtains planning permission. A housing association offers to buy the land for much more than it cost and Company A accepts the offer. The sale of the land is exempt and so the original intended use never began. Company A has to pay back the VAT it claimed on the purchase in the VAT period the change of intention took place.

Clawback and payback

These clawback and payback provisions apply to any business asset (goods or services) where full or partial VAT recovery has taken place based on intended use, and the intention changes before the asset has been brought into use. The adjustment period for a change in intended use lasts six years, so always check when an asset was purchased if you are intending to change its use.

Tip. The change of intended use provisions work both ways. So if you bought computer equipment for use in the VAT-exempt financial services department of your accountancy practice but decided to use it in the (taxable) audit department instead, you could then recover the VAT when your intention changes.

Non-business use

From 1 January 2011 the change of intended use rules were extended to apply to assets which changed to a non-business use. For example, if you bought a laptop for your business and reclaimed the VAT but then decided to give it your son at university, you would have to repay the VAT that had previously been claimed.

Partial recovery

If you decide that an asset is going to be used for both taxable and exempt use, you can recover 50% of the VAT on the purchase. But if you actually only use it for making taxable supplies, you can adjust the VAT recovery and reclaim the balance of the VAT.

Adjustments of the input tax claimed under the change of use provisions are not error corrections. The input tax was claimed correctly and any adjustments are made on the VAT return in which the change of intention occurred. Therefore, the adjustments are not subject to interest or penalties.

Actual use

The change of intended use provisions don’t apply once an asset has actually been used in the business - unless it’s being accounted for under the capital goods scheme. For example, you buy some computer equipment and use it for a month in your audit department and recover all the VAT as it relates to making taxable supplies. You then transfer it to financial services, but you wouldn’t be required to pay back any VAT under these provisions.