This blog is about VAT. Rather than trying to provide totally comprehensive explanations of complex VAT issues, this blog seeks to be thought-provoking on all things VAT!
Claiming Input tax pre-registration
A person can reclaim VAT incurred before registration for VAT, and even before a company was incorporated. However, there are certain conditions and restrictions, which the claimant will need to be aware of.
You should note that the right to reclaim VAT is statutory, not concessionary. Regulation 111 provides for this. The provision indicates that HMRC ‘may authorise’ repayment of such VAT, subject to their guidance; so this means a claim is not necessarily automatic.
Just to make matters more complex, the treatment of ‘goods’ and ‘services’ is different. In most cases, of course, the distinction is clear. One area where problems arise is where the claimant has had construction work done. Such work is usually treated as a supply of services. This has the result that input tax may be lost. There have been a number of Tribunal cases where this view has been upheld.
Input tax can be claimed up to 4 years on goods purchased, as long as they remain ‘in stock’ at the date of registration; a record will need to be kept of this. Goods that have been consumed are not eligible, but goods that have been used to make other goods which are themselves in stock are eligible.
Input tax can only be claimed up to 6 months on services purchased. This is rather arbitrary. Interestingly, a few years ago, HMRC reviewed the matter, and chose to continue with the arrangement, rather than bring the treatment of goods and services into line.
Where the business is incorporated at the time of registration, input tax incurred pre-incorporation is also eligible for claim. In this situation, VAT can be claimed as long as the purchase was for the purpose of the activities of the company, and as long as the cost was reimbursed by the company to the person paying the money.
In the Tribunal case of SF Express Couriers Ltd), the Tribunal held that where VAT was incurred by an unregistered sole trader, who later incorporated, the company (having registered for VAT) could not reclaim the VAT, since the supply was not made to the company. This creates a fine line when a sole trader incorporates his business before he registers. (See this decision at http://www.bailii.org/uk/cases/UKFTT/TC/2012/TC01809.html)
HMRC guidance on pre-registration input tax is at http://www.hmrc.gov.uk/manuals/vitmanual/VIT32000.htm. (You can’t search VIT32000 on the HMRC home page; but you can search ‘HMRC VIT32000’ on Google.)
For new businesses, the registration date can provide some opportunity for planning. Do explain that to the client. For example, if you back-date the registration; does that mean additional input tax can be reclaimed, and any extra output tax recovered from the customers?
Where the client is partly exempt, or has non-business income, then matters are treated quite differently. For example, input tax on a Capital Item (under the CGS) has its own rules. In this situation, professional advice is essential.