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HMRC internal manual

VAT Partial Exemption Guidance

Other Partial Exemption issues: changes in intention or use: intentions

A taxable person is entitled to deduct input tax on goods or services that are used or to be used to make supplies with a right to deduct. It follows that he is entitled to deduct on the basis of an intention to make supplies with a right to deduct. Provided that you are satisfied the intention is genuine, deduction should be allowed. Intentions can be difficult to tie down, often being in the mind of a sole business or the director of a company. If you have reason to doubt a declared intention it is not unreasonable to ask the business to demonstrate his intention to you. For example, if a business has declared an intention to sell property, it is not unreasonable to expect him to have had contact with estate agents and be taking steps to facilitate a sale.

For the purpose of attribution it is important to know exactly what a business’s intentions are. It is also important to recognise the possibility that goods and services received might be used for more than one purpose. It is the full intention of the business that sets both the initial attribution and any new attribution. A business’s intention with regard to use at the time of the receipt of the supply determines the provisional right to deduct.

The liability is determined according to the law in force at the time that the supply is received. Thus if a business recovers input tax based upon an intention to make supplies with a right to deduct and in the event he makes the supplies that he intended yet in the meantime the liability has changed and those intended supplies have since become exempt, no adjustment under the clawback rules is due.