Clawback/payback – Partial Exemption
If input tax is deducted in full because the relevant goods and services are intended to be used exclusively in making taxable supplies but, in the event, that intention changes or they are in fact used (and before the original intention is fulfilled) 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 (“clawback”).
The reverse can also apply where goods and services initially intended for exempt use but where the intention changes or they are actually used to make taxable supplies (“payback”).
For further information please refer to Chapter 13 of HMRC VAT Notice 706.
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