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HMRC internal manual

VAT Input Tax

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HM Revenue & Customs
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Is it input tax: changes in the use of services

 

Background

Where

  • services have been supplied to a taxable person; and
  • full input tax was claimed because they were obtained for a wholly business purpose

there may be a charge to output tax if the use of the services later changes.

The Supply of Services Order 1993 provides a mechanism for the recovery or ‘clawback’ of input tax. It applies to input tax which has been claimed in full on supplies of services later put to:

  • any private use (being private use by anyone including staff and customers); or
  • non-business use.

If the services are acquired after 1 January 2011 and are, or give rise to, the following capital items:

  • interests in land, buildings and civil engineering works including services of construction, refurbishment, fitting out, alteration and extension where the VAT-bearing capital expenditure is £250,000 or more; or
  • ships, boats or other vessels and aircraft including manufacture, refurbishment, fitting out, alteration and extension where the VAT-bearing capital expenditure is £50,000 or more

any change in use will be adjusted through the Capital Goods Scheme (see PE Partial Exemption).

However, if the services acquired after 1 January 2011 are of the type which might be capital services but fall below the monetary limits, any change in use will not trigger a charge.

Please note that the Supply of Services Order 1993 applies both to temporary and permanent changes of use.

Exceptions - apportionment of VAT incurred

The Supply of Services Order 1993 does not apply if there has been an apportionment under section 24(5) of the VAT Act 1994. This apportionment would have been made to reflect any non-business or private use of the VAT incurred on services. No further adjustment is needed if use changes later.

This underlines the importance of working out at the time the VAT is incurred any intended private or non-business use of the services after they have been acquired. So an organisation that has both:

  • business activities (charity shops); and
  • non-business activities (charitable activities for which there is no charge)

must consider all future uses of services at the time they are acquired to work out properly the amount of tax that can be recovered.

For example, imagine that a charity buys a payroll system that it initially intends to use for shop staff only (wholly business with full recovery) but later intends to use in the organisation as a whole. The initial deduction must take this into account. An apportionment of the tax is appropriate.

Many services are consumed immediately at the time of supply, for example those of an emergency plumber, and these will never fall within the Supply of Services Order. However, other services are capable of providing a benefit that can be enjoyed over a longer period of time. These services are therefore much more like supplies of goods.

Consider the following examples:

  • A sole proprietor extends their house to make an office. The total cost of the extension is £20,000. The initial use is entirely for business purposes. The sole proprietor can therefore recover the VAT in full. After two years the business has expanded. A new office is established. The extension is converted into a snooker room. No charge arises under the Supply of Services Order 1993 because the extension was of a type capable of being a capital item if of sufficient value. That the building does not fall to be adjusted under the Capital Goods Scheme as it is below £250,000 in value does not affect this. However, input VAT should not have been claimed in full in the first place if the sole proprietor had expected the change in use at the time the VAT was incurred.
  • A charity acquires a software package that it uses for both its business activities (shops) and its non-business charitable work. The VAT incurred is apportioned. Only that VAT which relates to the business activities is recovered. The non-business activities increase dramatically such that the software package is used almost exclusively for that purpose. No charge arises as the VAT incurred was apportioned at the time of acquisition. Therefore the Supply of Services Order 1993 cannot apply.
  • A charity acquires a software package that it uses at first wholly for its business activities. The VAT is recovered in full. Later on the package is used across the organisation as a whole for both business and non-business activities. A charge arises under the Supply of Services Order.