Many newly VAT registered businesses owners miss out on valuable relief This is because they misunderstand the rules for claiming pre-registration VAT. However, the legislation often allows far wider scope for recovery than anticipated.
If your business has recently registered for VAT, you can still recover VAT on earlier business costs. Therefore, understanding the rules can generate a significant cash flow advantage.
What Is Pre-Registration VAT?
When your business registers for VAT, it can recover VAT incurred before registration. However, strict conditions apply.
The rules differ between:
Consequently, you'll need to review any historic expenditure carefully prior to submitting your first VAT return.
Claiming Pre-Registration VAT on Goods
HMRC will permit recovery of VAT on goods purchased up to four years prior to VAT registration. However, the goods must satisfy several important conditions.
Importantly, goods can include:
Where appropriate, your business should also prepare a detailed stock account. Furthermore, this should indicate quantities, acquisition dates and usage history.
HMRC’s Major Change on Fixed Assets
Previously, HMRC frequently restricted VAT recovery where a business used assets prior to VAT registration. However, HMRC changed its policy in 2016 following legal challenges.
Subsequently, the revised guidance now confirms that businesses may recover full VAT on qualifying fixed assets still used at the date of registration.
Moreover, the guidance states:
For example, VAT suffered on a van purchased three years before VAT registration may still qualify for full recovery.
Claiming Pre-Registration VAT on Services
Conversely, the rules for services are more restrictive. Notably, businesses may recover VAT suffered on services received within six months before VAT registration.
However, the services must:
Examples can include:
It is necessary to keep records of those services, including descriptions of the services and the dates when they were received. Additionally, if the services relate to goods that were disposed of after registering for VAT, your records should include relevant details and dates.
Equally importantly, if your business has a backdated registration date, this becomes the relevant date for working out the time limits.
Capital Goods Scheme: Extended Recovery Periods
In some cases, businesses can recover VAT far beyond the standard four-year limit. This frequently applies under the Capital Goods Scheme, specifically, the following assets:
Notably, in these cases:
However, this will only apply where, at the time of acquisition, your business intended to make some business use of the capital item such as making exempt supplies or taxable supplies below the registration threshold.
Mixed Supplies Create Serious VAT Risks
In some cases, supplies from one supplier may consist of a combination of both services and goods. However, whether they should be treated as multiple supplies or a single supply depends on the facts and circumstances.
As a result, this can cause issues for those start-up businesses spending substantial sums on refurbishing and fitting out their trading premises. For example, shop fit outs and restaurant conversions.
This is because of the different recovery deadlines for goods and services.
Partial exemption
The pre-registration rules don't dictate how VAT claims apply to partially VAT exempt businesses. In other words, those businesses whose turnover consists of a mixture of VATable and exempt supplies.
However, generally speaking, HMRC will permit VAT to be recovered where the goods or services concerned were or will be used to make VATable supplies.
Pre-Incorporation VAT Recovery
Newly formed companies can sometimes recover VAT incurred before incorporation. However, several important conditions apply.
The individual who incurred the expenditure must:
Additionally, the company must use the goods or services to make taxable supplies. Unfortunately, Businesses often overlook these rules during incorporation planning.
Key Practical Tips for Claiming Pre-Registration VAT
Businesses should take proactive steps before filing their first VAT return. As a general rule, we recommend the following:
Importantly, poor documentation often undermines the credibility of VAT recovery claims during HMRC enquiries.
Final Thoughts on Claiming Pre-Registration VAT
Many businesses significantly underclaim VAT during registration.
However, the rules around claiming pre-registration VAT can create significant refunds when handled correctly. The fine detail matters enormously. Furthermore, small differences in invoicing, ownership and contract wording can dramatically change recovery outcomes.
Therefore, you should review historic expenditure very carefully before submitting your first VAT return to avoid any missed opportunities and issues with HMRC.
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And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].
Alternatively, please feel free to complete our Business Questionnaire here.