PE61200 - Other Partial Exemption issues: changes in intention or use: when an adjustment is required
An adjustment is required where there is a change in the factors used to determine the initial deduction of input tax. For example, if input tax is deducted in full because the relevant goods and services are intended to be used exclusively in making supplies with a right to deduct, but in the event they are used either in whole or in part in making supplies with no right to deduct, the law requires that the original attribution of the input tax should be adjusted to take account of this fact. This type of adjustment actually alters the status of the input tax initially incurred. For example, input tax which had been attributed to supplies with a right to deduct can become input tax without the right to deduct and vice versa.
The attribution of input tax incurred in a tax year is provisional until such time that the longer period adjustment finalises its attribution. If, within the same tax year that the input tax was incurred, a different intention is substituted (or a supply is actually made) which is of a different liability, then an adjustment must be made by re-attributing the input tax concerned in that year’s longer period adjustment, often referred to as the ‘annual adjustment’ (see PE37000 - Longer period adjustment). The “clawback” and “payback” rules described below will therefore not apply.
If the business’s change of intention or use of the goods or services occurs after the tax year in which the input tax was incurred, but within 6 years of the start of the prescribed period in which the input tax was incurred, then an adjustment is due under what are generally known as the “clawback” or “payback” provisions. These are described more fully in Notice 706, section 13.
Clawback / payback adjustments only apply in cases where, before an original intention is fulfilled, a taxable person changes the use or intended use after the longer period ends (or, if a longer period does not apply, after the end of the tax year in which the input tax was incurred).
Although adjustments are physically undertaken at the time that the change in use or intended use occurs, they are considered in the context of the prescribed accounting period and longer period (if any) in which the input tax was first attributed. Account has to be taken of the possible effects on the calculation carried out in that period in accordance with the agreed partial exemption method or of the change in the nature of the input tax on the application of the de minimis limits in that period.