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HMRC internal manual

VAT Government and Public Bodies

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HM Revenue & Customs
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Section 33 bodies: capital projects and other adjustments: change of intention

Introduction

A section 33 body may incur VAT on purchases with the intention of using them in making taxable or exempt supplies or in carrying on a non-business activity. However, if that intention changes before making the supplies, or undertaking the activity, it will need to review the original attribution and possibly make an adjustment.

Change from taxable or non-business to exempt use

Where the intention is to make taxable or non-business supplies, the VAT is provisionally treated as recoverable in full in the year in which it is incurred. If, in a subsequent year and before it is used in making taxable or non-business supplies, the body uses it in making an exempt supply, or forms an intention to use it in making exempt supplies, the amount of VAT should be identified’.

That identified VAT should be added to the total exempt input tax determined by the refund calculation for the year in which that VAT was originally incurred and the revised result using the same method should be noted.

The combined effect of all the changes should be compared to the result of the insignificance test for the year in which the VAT was originally incurred. If the revised result remains within the insignificance test for that year no further action need be taken.

If the revised result breaches , or still breaches, the test of insignificance for the year in which the VAT was originally incurred, then the ‘identified’ VAT must be repaid on the next VAT return.

It is only the VAT for which there has been a change, either by change of intention or first time use, that is to be repaid. No adjustment is necessary in respect of any other VAT included in the original refund calculation.

Changes from exempt to taxable or non-business use

Where the intention is to make exempt supplies the VAT is treated as exempt input tax in the year in which it is incurred. If, in a subsequent year, and before it is used in making exempt supplies, the body actually uses it in making a taxable supply, or forms an intention to do so, the amount of VAT should be ‘identified’.

If, in the year in which the VAT was originally incurred, the authority was within the insignificance test so that the identified VAT was recovered in full, no further adjustment is to be made. However, if, in that year the body breached the insignificance test, so that the identified VAT was originally restricted, the amount may be reclaimed on the next VAT return.

It is only the identified VAT that may be reclaimed. No adjustment is to be made in respect of any other VAT included in the original refund calculation.