HMRC has changed its interpretation of a key VAT rule so that newly registered businesses are being denied VAT refunds.
What’s more HMRC hasn’t publically announced this change in practice, so tax advisers and taxpayers have been potentially over-claiming input VAT on new VAT registrations.
So what’s changed?
When an established business registers for VAT it will already hold some stock and assets which will be used after the registration date in connection with its VATable sales. For the last 43 years, the trader has been able to reclaim all the input VAT paid on those goods, in his first VAT return, as long as these conditions are met:
- the goods were acquired in the four years before the date of registration
- the items are still held at the date of registration.
However, if you ring the VAT helpline you may now be told the trader can’t reclaim all of the input VAT paid on those goods. HMRC says the input VAT should be reduced to take into account the use that has been made of the goods before the VAT registration date. There has been no change in practice for VAT reclaims on services, which must be provided in the six months before registration.
Ken has been a self-employed pest controller for many years. He registered for VAT with effect from 1 May 2015, at which point he held a van that cost him £24,000 on 1 May 2013, and equipment that he bought for £9,000 on 1 May 2012, both inclusive of VAT. He expects to use the van for eight years and the tools for five years.
Previously most VAT advisers would advise Ken to reclaim VAT of £4,000 in respect of the van and £1,500 paid on the equipment.
The new HMRC interpretation of EC VAT Directive 2006/112 article 289 (set out in VAT Input Tax Manual para 32000) is that as the van has been used for 2/8th of its life, just £3,000 (6/8 x 4000) of the input VAT can be reclaimed. For the equipment a similar calculation reduces the VAT reclaim to £600 (2/5 x1500).
Ken is obviously losing out by £,1900 of unrecoverable VAT.
Any taxpayer would be confused by the advice given by the VAT helpline, as that doesn’t agree with the guidance given in the public VAT Notices 700 (at section 11) and 700/1 (at para 5.2). AccountingWeb member Littlelow was certainly puzzled by advice he got from the VAT helpline a year ago when he called about a very similar problem.
So when did HMRC change their practice and why?
HMRC apparently changed their practice from 1 January 2011, but it is not possible to confirm this as the record of updates to the VAT input manual only goes back to February 2012.
The UK law is set out in VAT regulation (SI 1995/2518) reg. 111, which doesn’t mention the need to restrict input VAT in respect of the use assets have already been put at the registration date. However, Neil Warren writing in Taxation Magazine is convinced that the new HMRC practice is correct, when article 289 is considered.
Other VAT experts are not swayed by HMRC’s reasoning. Wayne Neale head of VAT at Larking Gowen says: “This is taxation by reinterpretation. In my view, HMRC has an extremely dubious reasoning for correcting a supposed 43 year error on pre-registration VAT.”
Wayne goes on to say "HMRC still require a taxpayer to declare full VAT on the sale of the assets which have been used for business and this quid pro quo has always been at the heart of the rules.”
So what has been your experience the VAT helpline advice on reclaiming pre-registration VAT?