HM Revenue and Customs Brief 57/09
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Issued 4 September 2009
VAT: Partial exemption - policy in respect of payback claims in the light of
the High Court decision in CHA
This Revenue and Customs Brief confirms HM Revenue & Customs (HMRC) policy on
the VAT partial exemption ‘payback’ rules following the High Court decision in
the case of Community Housing Association (CHA). It uses a number of specialist
terms which are explained more fully in
Notice 706 Partial exemption.
VAT Regulation 109, ‘payback’ allows a business to recoup input tax on costs
that are incurred to make exempt supplies, but are instead used wholly or partly
to make taxable supplies. Payback also applies to costs incurred for both
taxable and exempt purposes, but actually used to make wholly taxable supplies.
A payback claim cannot be made unless:
- the costs in question were not used as originally intended
- the change of use arises after the end of the partial exemption longer
period (if there is one)
- the change of use results in taxable supplies or both taxable and exempt
supplies if the original intention had been to make a wholly exempt supply
Background to the CHA case
CHA is a housing association providing mainly rental housing, which is exempt
for VAT purposes. CHA incurred input tax related to the construction of new
dwellings for use in its business. CHA subsequently changed its operation by
inserting a new subsidiary between itself and its suppliers. Then, having raised
invoices to the subsidiary for the value of work undertaken on uncompleted
projects prior to this change, CHA lodged a ‘payback’ claim. They argued that
input tax on costs for part completed projects incurred prior to the change were
not used as originally intended and were now attributable to a taxable supply
from CHA to the new subsidiary. HMRC rejected the claim on the grounds that
there were no supplies of services between CHA and its subsidiary and, even if
there were, the old costs did not become cost components of the supplies. The
Tribunal agreed with HMRC.
High Court decision
The High Court overturned the Tribunal decision and allowed the payback
claim. The High Court found as fact that CHA made supplies to its subsidiary and
that the supplies transferred useful material and rights arising from the old
supplies received by CHA. Based on these findings the High Court’s decision was
inevitable. HMRC have not appealed.
Supply covers a wide range of circumstances but there are some basic
requirements that must apply before a supply can exist. The recipient of the
supply must receive some benefit, he must provide some consideration and the
consideration must be paid in return for the benefit.
Any business making a supply will incur costs in doing so. These are the cost
components of the supply. Conclusions on what the cost components of any supply
are will flow from an analysis of the nature of that supply. The mere raising of
invoices and passing of funds between companies does not automatically create
supplies. Careful analysis may be called for, especially if the companies are
About the Author
© Crown Copyright 2009.
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Article Published/Sorted/Amended on Scopulus 2009-09-09 16:27:49 in Tax Articles