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Tax on pre-registration input tax ?

Tax on pre-registration input tax ?

I have just made and agreed a claim for pre-registration input tax for a client who has just registered for VAT. For the size of his business, it is a significant figure. What I cannot seem to confirm is whether this "income" is income for tax purposes. Logically, if I reclaim the 20% VAT on my mobile for the last six months, then this reduces the P&L charge (ie it is taxable). Also logically, if I reclaim VAT on an asset of the business, it's cost has reduced - but I have previously claimed annual investment allowance of 100% in a previous year. I have currently credited the total amount of the input tax claimed to P&L, but is it taxable ? I cannot find where it is even though logic tells me it should be.

Thanks as always.

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20th Feb 2016 17:13

eh?

The VAT you have recovered is the recovery of VAT you have paid to suppliers and as such it has no P&L effect.

If you have previously claimed that VAT as an expense (and capital allowances on part of it) then you have over-claimed expenses and capital allowances and you need to correct those over-claims.

So the outcome is that you will be paying tax on the amount of VAT reclaimed (subject to CA adjustment) but you are not paying tax on VAT recovered you will be paying it on expenses over-claimed

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By Old Greying Accountant
20th Feb 2016 22:30

Eh, no ...

Joe Soap wrote:

The VAT you have recovered is the recovery of VAT you have paid to suppliers and as such it has no P&L effect.

If you have previously claimed that VAT as an expense (and capital allowances on part of it) then you have over-claimed expenses and capital allowances and you need to correct those over-claims.

So the outcome is that you will be paying tax on the amount of VAT reclaimed (subject to CA adjustment) but you are not paying tax on VAT recovered you will be paying it on expenses over-claimed

... if you were not registered at the time the expenses would have correctly been gross on the P&L, assuming that P&L is closed and submitted I would show the reclaimed VAT as a credit on the P&L (and as a proceeds on the capital allowances claim. If still open you can credit the VAT to the relevant expenses/assets.

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21st Feb 2016 10:31

Tax on Pre-Registration Input Tax ?

Thanks both - perhaps I should have made clear that I was referring to pre-registration input VAT related to assets purchased and expenses incurred in previous accounting periods /tax years under the four years/six months reclaim rules.

You both have reached the same conclusion as I have, but I cannot see anywhere in the HMRC manuals where this is made clear. It must be a question asked many times before; I would have thought there would be a definitive answer which would make clear whether this windfall is income for tax purposes or in the nature of a non-taxable grant to a business. 

In your comment above, I find it interesting that on the one hand you say  "The VAT you have recovered is the recovery of VAT you have paid to suppliers and as such it has no P&L effect "  (absolutely correct), then go on to say "If you have previously claimed that VAT as an expense then you have over-claimed expenses" which is incorrect for the time in which it occurred, in a tax year in which the business was not registered for VAT.

Maybe I am just being nit-picking but I really would like to know.

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21st Feb 2016 09:58

Reduction

See it as a partial refund on his expenditure.

It's not "income" for me.

I would deal with it as OGA.  A credit against the relevant expense in the next trading period or Capital Allowances disposal.

If it's significant, I suppose you could always alter the previous year's accounts.

 

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21st Feb 2016 10:35

Tax on Pre-Registration Input Tax ?

Thanks  lionofludesch

I think you have summed up the question better then I

1 )  See it as a partial refund on his expenditure.  (ie taxable)

2  ) It's not "income" for me.  (me too, I think !!)

Which is it ?????

 

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21st Feb 2016 10:37

Both

1. Less expenditure

2. Not income

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By Old Greying Accountant
21st Feb 2016 17:06

does it really matter ...

... the fact is it is taxable because profit will rise, the rest is semantics!

I would have it as a credit under other income clearly labelled pre-registration VAT recovered as that is easiest. unless you are doping detailed SA on the accounts each month anything else is a waste of everyones time. The only people who may ask are HMRC, just give them the back-up schedule if they do.

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