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HMRC internal manual

VAT Partial Exemption Guidance

HM Revenue & Customs
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Other Partial Exemption issues: changes in intention or use: background and legal basis


The law clearly envisages that the majority of goods and services received by a taxable person are consumed more or less immediately in making supplies. The input tax on these goods and services is attributed to the relevant supplies provisionally in the prescribed accounting period in which it is incurred. The annual adjustment carried out at the end of the tax year or longer period, taken together with any adjustment using the standard method override, crystallises that provisional attribution. If the intended supply (or supplies) to which the input tax is thus attributed is made (whether in the longer period or later) there is, in most cases, no need for any subsequent adjustment.

However, there may be instances where an adjustment to the initial deduction is appropriate and Chapter 5, Articles 184 to 192 of the Principal VAT Directive (formerly Article 20 of the Sixth Directive) allows member states to lay down procedures for making such adjustments and also sets out the broad framework for adjustments to input tax incurred on capital goods [see PE67000 - The Capital Goods Scheme (CGS)].

The UK law is in regulations 108 to 110 in Part XIV of the VAT Regulations 1995. Regulations 108 and 109 deal with adjustments to the initial attribution; Regulation 110 ensures that the rules apply where goods and services are used to make supplies outside the UK.