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HMRC internal manual

VAT Partial Exemption Guidance

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HM Revenue & Customs
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Other Partial Exemption issues: changes in intention or use: impact of RSA HL [2003] STC 832

The group used a number of properties for the purpose of its insurance business, but subsequently vacated, and decided to re-let them. It elected to waive exemption in respect of the properties and subsequently claimed a repayment of input tax incurred on rents and service charges relating to the properties prior to the election, while they were vacant, although it had initially attributed this input tax to exempt supplies. The Commissioners rejected the claim and RSA appealed, contending that they were entitled to make an adjustment under regulation 109.

The Tribunal rejected this contention, and after being reversed at the High Court, the HL restored the decision. Lord Hoffman observed “in order to come within regulation 109, RSA must have first had an intention to use the inputs in supplying exempt sub-leases and then used them or formed an intention to use them in supplying taxable sub-leases.” Applying the principals in Belgium v Ghent Coal Terminal (See PE21500 - Attribution case law) just as a failure to make taxable supplies does not destroy a right of deduction, so a failure to make exempt ones does not create one.

Following the comments of Lord Hoffmann in RSA there has been speculation that the lack of a clear intention of what supplies would eventually be made in speculative property projects prevents the later application of payback or clawback. HMRC view the apportionment of residual input tax incurred in speculative projects under partial exemption methods as attribution to taxable and exempt intentions and thus view the input tax as eligible for later adjustment if all other conditions are met.