HMRC clarifies it’s policy on the deduction of VAT incurred prior to registration
There has long been uncertainty regarding the stance of HMRC on the deduction VAT incurred prior to a company’s registration for VAT. This has led to inconsistent treatment of output VAT on such assets.
Whilst there has been no change in HMRC’s policy, we are pleased to report that their policy has been clarified.
HMRC states that:
– VAT on services received within six months of registration and used in the business at the date of registration is recoverable in full.
– VAT on stock is deductible to the extent that the goods are still on hand at registration.
– VAT on fixed assets purchased within four years of registration is recoverable in full, providing the assets are still in use by the business at registration.
Put simply, whilst VAT on services incurred leading up to registration can continue to be claimed in full, there may be some apportionment required for recovering the VAT on stock on hand to take into account any pre-registration consumption of the goods. This will impact all newly registered businesses and could present a further squeeze on start-up businesses.
Positively, however, this clarification paves the way for reclaims of under claimed input tax if VAT had been restricted to reflect pre-registration use, or if HMRC had raised an assessment to account for pre-registration use. The claim for VAT must be made within four years of the reduced claim being made or the date of assessment by HMRC.
The restriction on expenditure incurred prior to the date of registration is to take account of the consumable nature of services and, unless the VAT is clearly not incurred in the making of taxable supplies, there is no need to examine the claim further from this point of view.
When looking at recovery of pre-registration expenditure it is important, because of the time limits, to ensure that the date of registration is the most beneficial for recovery of VAT. Although many businesses wait until a compulsory registration is necessary, it is possible to register on a voluntary basis providing that taxable supplies are being made or intended. A registration date that maximises input tax recovery can therefore be arranged. If the registration is on a voluntary basis, once the date for registration is selected it cannot be backdated further. It is therefore important to get this right first time. In addition, where output tax values would be low but input tax values high, it is possible to backdate the date of VAT registration by up to four years, giving a maximum claim period for goods for eight years. If the output tax which would be payable by backdating, exceeds the input tax to be claimed this is obviously not worthwhile.
For advice on this or any other VAT related matters please contact us.
The information was correct at time of publishing but may now be out of date.