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Imagine you’ve claimed back VAT on a big purchase for your business, thinking you’ll use it to make taxable sales. But then your plans change. Maybe you can’t sell those new flats you built, so you decide to rent them out instead. Suddenly, you’re in a different VAT world. Here’s what you need to know about the ‘payback’ and ‘clawback’ rules in simple terms.
What are these rules?
They’re HMRC’s way of making sure the VAT you’ve claimed (or not claimed) matches what you’re actually doing in your business.
The Clawback Rule:
This is when you might have to pay back some VAT you’ve already claimed. It happens if:
- You switch from making taxable supplies to exempt supplies
- You start using business items for personal use
For example, you reclaimed VAT on building materials for houses you planned to sell, but now you’re renting them out instead. Rental income is VAT-exempt, so you might have to repay that VAT.
The Payback Rule:
This is the opposite. You might be able to claim back VAT you couldn’t before if:
- You switch from making exempt supplies to taxable supplies
For example, You bought something thinking you’d use it for VAT-exempt activities, but now you’re using it for taxable business purposes.
How far back do these rules go?
Usually, they apply to VAT claimed or not claimed in the last six years.
Is there any good news?
Yes! If your change of plan is temporary, you might only have to repay some of the VAT. For instance, if you’re only renting out those houses for two years, you might only have to repay 20% of the VAT you claimed. Also, if the amount of VAT in question is small (less than £625 a month on average and not more than 50% of your total input VAT), you might not have to make any adjustment at all.
What should you do?
- Keep good records of your VAT claims and business plans
- If your plans change, think about the VAT implications
- If in doubt, talk to an accountant or VAT specialist
Remember, VAT can be complicated, especially when your business plans change. But being aware of these rules can help you avoid nasty surprises and save you some money in the long run.