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Reclaiming pre-registration VAT – hidden rules could cause problems

23rd September 2020

When opening a business, your goal will be to achieve as much success as possible, especially with your turnover. As a business owner, you will have an obstacle by the name of tax, and you will probably be familiar with the corporation tax which you pay on the profit made. Once your business’ turnover (VATable) exceeds £85,000 per year, you will also need to register your business for VAT and submit, usually quarterly, VAT returns. Reaching this threshold can be quite frightening for businesses, you will have to comply with further work and sometimes pay extra VAT. However, planning carefully with your accountant will make the transition smoother. 

What is VAT payable? The VAT payable to HMRC is the difference between the VAT charged on sales and the VAT paid (called input VAT) on expenses, goods and services. Therefore, one golden rule to reduce the VAT payable is to make sure all the possible input VAT. 

Some very good news is that you can claim back some of the Input VAT that you paid on all the expenses and purchases before you registered for VAT (called pre-registration VAT). You can find more about this in paragraph 11 of HMRC VAT notice 700. However, you should be aware that there are some restrictions on what you can claim. HMRC VAT Input Tax manual (VIT32000) gives further guidance on this. Summary below:

Reclaiming VAT on goods:

In the case of goods (either stock for resale or fixed assets) which were bought 4 years prior to the VAT registration and if the goods remained on hand at the date of registration to be used in the newly registered business, the VAT paid on those goods is reclaimable.

Reclaiming VAT on services:

In the case of services, if the supply was made not more than six months before the date of registration and the services obtained will relate to business activity carried on at the time of registration, the VAT paid on those services is reclaimable. 

Helpful Tip: It is always a good idea to keep a record of the VAT receipts/invoices with the VAT breakdown even if you are not currently VAT registered, as if you register in the future, keeping this breakdown would allow you to reclaim that VAT back properly. 

Hidden Rules: However, going deeper through the VAT regulations 111 you will find that if an asset was used for the purposes of supplying goods or services that did not have VAT applied, then a portion of the asset’s input VAT should not be reclaimable. For example, a van that is expected to be used for 4 years is purchased two years before VAT registration. During this first two years pre-registration period it is used to deliver goods which do not have VAT applied. In this situation, HMRC would say that half of the VAT paid for the van could not be reclaimed.

In conclusion, being well organised and keeping the invoices for all of your VAT reclaimable expenses even though you have not yet reached the threshold for VAT registration, will be useful in the long run. It will mean you can reclaim the VAT paid on goods 4 years prior to registration, as well as the VAT paid on services 6 months prior to registration and this way get the best results on tax efficiency. 

If you are in need of any professional advice, please get in touch with our Chartered Accountants at Howlader and Co. by following this link https://howladerandco.com/contact/.