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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: when a change of use occurs

The High Court decision in The University College of Wales, Cardiff (STC 611) was useful in clarifying adjustments when a change of use occurs. The University had undertaken a rebuilding programme at a time when the supplies to it were zero-rated. When the law changed in 1989 it incurred substantial input tax, which it had not anticipated. The Commissioners treated the tax on the buildings as non-attributable and apportioned according to the taxable and exempt outputs in that year. In an endeavour to increase the taxable element, in 1992, the University entered into a lease/leaseback arrangement and then attempted to recover the input tax incurred between April 1989 and April 1990 in relation to the property by comparing the exempt use between October 1990 and the start of the taxable lease in 1992 and the length of the taxable lease. The High Court agreed with the Commissioners that the original deduction in 1990 had to be made according to the intentions at that time. At that time the lease/leaseback had not been envisaged. (In this case no adjustment was appropriate under the Capital Goods Scheme, since it only effects tax incurred after April 1990)

Determination of a business’s intention can be very difficult when the only evidence appears to be in the business’s mind. For the majority of genuine intentions there will be some form of tangible supporting evidence, such as estate agency documentation and so forth. If you have some reason to seriously doubt the business’s declared intention you should ask him to substantiate it to your satisfaction.