The ins and outs of reclaiming pre-registration VAT

 

The rules regarding pre-registration VAT have always been a source of confusion. HMRC’s tinkering of its own internal guidance has made matters worse. What do you need to know to ensure you reclaim all that you’re entitled to?

HMRC’s guidance

HMRC’s guidance manuals are supposed to provide in-depth information about the tax rules, primarily for its staff, but also the public, especially accountants and tax advisors. They’re mainly accurate and factual but occasionally some rogue advice creeps in, as was the case regarding advice on VAT paid on purchases made before registration.

For a long time the accepted view was that a business could reclaim 100% of the VAT it paid on purchases (input tax) of equipment it had made before it registered, subject of course to conditions. Then in 2011 HMRC updated its guidance in a way that seemed to be a change of approach. It said that the amount of VAT that can be recovered should reflect the use of purchases for the period “before” registration.

Example. In May 2012 Fred bought a van for his business which cost £15,000 plus £3,000 VAT. He also used the van for private journeys 30% of the time. In March 2016 Fred registered for VAT. Under HMRC’s original guidance he could have reclaimed all of the £3,000 VAT, but according to its 2011 advice Fred should have reduced this by £900 and reclaimed just £2,100 (£3,000 – 30%).

Clarification

HMRC’s revised view of pre-registration VAT wasn’t common knowledge until early in 2015, at which time it caused a stir. So much so that the Institute of Taxation made representations to HMRC asking for an explanation. It responded by saying it hadn’t changed its policy, and in November 2016 it issued a statement to that effect. The 2011 guidance had been badly worded. In other words, a 100% reclaim of the VAT is possible regardless of pre-registration use of the asset. Naturally, HMRC isn’t gracious enough to admit its error, even though it clearly accepts there was one.

Tip. HMRC’s statement says that if, in the last four years, you restricted a VAT claim for non-business/exempt use in the period before registration you can correct it. So in our example Fred might now be entitled to reclaim the £900 he paid in May 2012 even though it’s beyond the normal four-year time limit allowed for VAT claims. This is because the time limit runs from the date he registered, i.e. March 2016.

A warning – post-registration usage

In setting the record straight HMRC also correctly points out that post-registration non-business or exempt use of purchases will affect the amount of VAT that can be reclaimed.

Example. Fred’s non-business use of the van up to the date he registered was 30%, but after that date, because of a change in his business, he expected it to reduce to just 10%, which has proved to be the case. Therefore, he’s entitled to reclaim some of the £900 he didn’t originally, but not all of it. He must restrict it to reflect post-registration non-business use. So he can now reclaim a further £600 and not £900 of VAT (£3,000 – 10% = £2,700, less already claimed £2,100, = £600).

By: FL Memo