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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.

Payback policy

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.

HMRC conclusion

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 close associates.


About the Author

© Crown Copyright 2009.

A licence is need to reproduce this article and has been republished for educational / informational purposes only. Article reproduced by permission of HM Revenue & Customs under the terms of a Click-Use Licence. Tax briefs are updated regularly and may be out of date at time of reading.



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Article Published/Sorted/Amended on Scopulus 2009-09-09 16:27:49 in Tax Articles

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