Pre-registration input VAT

by | Feb 16, 2021 | Business Start-up, Taxation

When a business registers for VAT, it’s important to know that you can claim for VAT incurred before the effective date of VAT registration (the ‘EDR’). This VAT is known as ‘pre-registration input VAT’.  The amounts involved can add up to a significant sum. If relevant to you, you should invest the time to make a claim for such VAT.

Subject to certain conditions, you can claim VAT incurred on:

  • goods purchased in the four years prior to the EDR.
  • services received in the six months prior to the EDR. 

This VAT should be claimed on your first VAT return following registration (add the VAT to your Box 4 figure).

These rules also apply to any business that registers for the VAT Flat Rate Scheme (‘FRS’). Once in the FRS, input VAT cannot be claimed on services and you may only reclaim input tax on capital goods where they cost more than £2,000.

As you’d expect, you cannot claim for VAT if the related goods/services were purchased for a private or non-business use.

Also, pre-registration VAT cannot be recovered on goods or services that formed part of onward sales made before the EDR.

Pre-registration VAT – Goods 

Goods means stocks (e.g. raw materials and finished goods bought for resale) and fixed assets (e.g. plant & equipment, IT equipment, commercial vehicles).

Stocks

VAT on stock purchases prior to the EDR is fully recoverable, if the goods were:

  • purchased in the four years prior to the EDR;
  • supplied to a business now registered for VAT;
  • supplied for business purposes and related to the business’ taxable activities; and
  • on hand at the EDR, or used to make other goods you still hold at the EDR.

To support your VAT claim, you should perform a full stockcount at the EDR, showing:

  • quantities of goods held and a description;
  • purchase dates;
  • purchase cost and VAT paid; and
  • information about how they relate to your business now.

You’ll also need proof of purchase (invoices and receipts).

Fixed Assets

For fixed assets purchased before and which are still used by the business at the EDR, you should prepare a list of the assets showing:

  • asset description;
  • date purchased;
  • purchase cost and VAT paid; and
  • information about how you are using the asset in your business now.

Again, you will also need proof of purchase (invoices and receipts).

The VAT on such assets can be claimed in full as pre-registration input VAT. There is no need to reduce the VAT claim to reflect any use of the assets prior to the EDR.

Example

Jane purchased a van in September 2017 for £12,000 (£10,000, plus VAT of £2,000) for use in her new business. She registers for VAT from 1 September 2020 (the EDR).  She is still using the van for business at that date.

She can, therefore, reclaim the full £2,000 input VAT on the new van. There is no need to restrict recovery to take account of the three years of use prior to registration.

Pre-registration VAT – Services 

In order to recover input VAT on services received in the six months prior to registration, the services must have been: 

  • supplied to the business now registered for VAT;
  • supplied for the purpose of the business and related to its taxable activities; and
  • not related to goods which were disposed of before registration. 

You’ll need to prepare a list of these services, which describes the services and the dates when they were received.

Capital Goods Scheme Expenditure

The four years (goods) and six months (services) time limits above do not apply to capital items, subject to the Capital Goods Scheme.

For most small businesses, the Capital Goods Scheme is not relevant. But if it is relevant to your business, you may be able to recover VAT incurred up to ten years prior to registration in respect of land, and up to five years prior to registration for other capital items. 

Mixed Supplies

There are situations where supplies from a single supplier are made up of a mixture of both services and goods.

Whether such supplies should be treated as multiple supplies or as a single supply depends on your specific circumstances.

This issue can be a problem for start-up businesses, which invest substantial sums on refurbishing and fitting out their trading premises.

If supplies to you are classed as multiple supplies, then it may be possible to separate out which supplies are supplies of goods and which are supplies of services, and then claim VAT according to the time limits for each type of supply.

If supplies are treated as a single supply, then they will either be goods or services. And the relevant time limit will apply.

This problem does not arise where a business is purchased as a going concern, where the new owner is VAT registered from the start.

Partial exemption

For partially exempt businesses, VAT legislation does not prescribe how the pre-registration rules should be applied.

HMRC generally allow such input VAT to be recovered to the extent that the goods or services were or will be used to make taxable supplies.  

The partial exemption de minimis limit does not apply to pre-registration VAT.

Pre-incorporation VAT

Newly incorporated companies can recover pre-incorporation input VAT incurred on goods and services provided:

  • the rules above for goods and/or services would apply, had the supply been made to the new company;
  • the person who incurred the expenditure becomes a shareholder, director or employee of the new company;
  • the person who incurred the expenditure is fully reimbursed by the new company; and
  • the person was not a taxable person at the time of supply. 

Pre-registration input VAT claims can add up to large amounts. So, all businesses should investigate this issue when they register for VAT. And, of course, follow the rules on what you can and cannot claim, and prepare detailed records to support your claim.   

If you need advice on this or any other accountancy, tax and business issue, get in touch for a no-obligation, free discussion – see our Contact Us page for how to reach us.

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Information in this publication is intended to provide only a general outline of the subjects covered. It should neither be regarded as comprehensive nor sufficient for making decisions, nor should it be used in place of professional advice. Whyatt Accountancy and the writer accept no responsibility for any loss arising from any action taken or not taken by anyone using this material.