VAT: Claiming pre-registration expenses

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Neil Warren examines a case where the accountant came under pressure to register a company for VAT without reviewing the implications for its pre-registration expenses.

Under pressure

SP Henson Engineering Ltd (TC06957) registered for VAT on 1 August 2016. This registration process appears to have been carried out by a junior member of staff working for the company’s external accountants, under heavy pressure from the company’s director.

The director wrongly thought that his company could claim input tax on all expenses incurred in the previous four years before the date of registration. He subsequently asked HMRC to backdate the VAT registration date to 14 December 2011, but HMRC refused this request.

Pre-registration input tax

There is no problem claiming pre-registration input tax on the first VAT return, but there are different conditions to meet for goods and services.

Goods

The VAT paid on stock or assets purchased in the four-year period before registration can be claimed. But those assets must be taken into use by the business during that time, and they must still be owned on the date when the business first became VAT registered. The good news is that input tax can be claimed based on the original purchase price of the asset, there is no adjustment needed for depreciation.

Services

VAT on services can only be claimed if the service was purchased within six months of registration, and the service must not have been consumed before the date of registration.

Example

Jim is a computer consultant who registered for VAT on 1 January 2019. He uses the services of a subcontractor, Jenny, to help deliver the projects he works on. Jenny is VAT registered, so when are her services treated as “consumed” by Jim? That depends on when Jim invoices for the projects that Jenny works on.

Jim invoices for project Alpha on 2 January 2019 and accounted for the output tax. Jenny had submitted invoices to Jim for her work on project Alpha throughout 2018. Jim can only claim the VAT on Jenny’s invoices which fell in the period from 1 July 2018 to 31 December 2018.

If Jim had invoiced for project Alpha before 1 January 2019, he would not have been able to claim input tax on those of Jenny’s invoices which related to project Alpha because her services have been consumed before he became VAT registered.

Voluntary registration

A request for voluntary VAT registration can be made retrospectively by going back up to four years. This is a useful concession for a business that either makes wholly or mainly zero-rated sales such as a bookshop. This concession can also be used by a business that makes standard-rated sales to recover input VAT, but it should ideally issue VAT-only invoices to customers to collect the VAT due on sales made in that earlier period.

It is, therefore, strange that the company in this case initially asked HMRC to backdate its registration to December 2011, more than the maximum four-year period. However, this request was subsequently adjusted to September 2012.

HMRC policy

HMRC has the power to agree a backdated VAT registration date but its policy is to only allow such requests if there has been “misunderstanding and genuine error” with the chosen date. An example would be where a person completing the VAT1 registration form online entered the requested starting date of registration as 21/1/18 instead of 1/12/18, by making a typing error.

HMRC guidance on amending registration dates is contained in its VAT Registration manual para VATREG25400. SP Henson Ltd had asked for a registration date of 1 August 2016, and the fact that the director had misunderstood the pre-registration input tax rules was not a relevant factor. The appeal was dismissed.

Warning to accountants 

The director’s view that he could claim input tax in respect of four years of expenses without accounting for a penny of output tax for sales in the same period was naïve to say the least. However, I wonder whether the accountants should be partly to blame for allowing a junior member of staff to send off the VAT1 registration form without approval from a more senior colleague.

There was a comment in the case report that the director was “insistent that she complete and submit the application” even though she was “not experienced in this process.”

Check your procedures

Advisers should be wary of a comment made in HMRC’s policy note VATREG25400: “If a business has lost out on pre-registration input tax which it would otherwise have been able to reclaim because its representative made a mistake [this means with the requested date of registration], it should pursue the representative, not HMRC, for financial redress.”

Is it time to check your own procedures on this important issue?

About Neil Warren

Neil Warren

Neil Warren is an independent VAT consultant and author who worked for Customs and Excise for 14 years until 1997.

Replies

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13th Mar 2019 11:15

Good article, thanks Neil. I have a client who built up a website (an online platform) which is his asset to generate income and incurred costs for the actual development and also incurred costs to borrow funds to invest in the development. strictly speaking the finance costs were incurred purely to obtain funding for the development. HMRC is refusing to go back more than 6 months as they consider both are services. Website is definitely an asset. What grounds we can challenge the HMRC decision?

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to pfconsult
13th Mar 2019 11:39

The supply of the bespoke website to your client is indeed a supply of services and not goods, I suspect that you will struggle to get HMRC to change their position.

I don't know what VATable costs your client incurred in securing funding but I can't imagine how any of those could be goods either.

Here's another article from Neil laying it out https://www.taxadvisermagazine.com/article/goods-or-services

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to Duggimon
13th Mar 2019 12:35

Thank you Duggimon. They paid a fee for a finance broker who charged VAT to secure funding for the development. My argument is that the website is a good as it's still available and their income is generated from this website. (capital expenditure)

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13th Mar 2019 17:08

Good article Neil, thanks.

I'm a little confused, it may be my reading but it seems to be suggesting that if you go back 4 years for goods (meeting the criteria) and claim the input tax you have to account for the output tax as well, have I mis read it?

Thanks

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to Leighley
15th Mar 2019 10:08

What I believe Neil is saying is that rather than make a claim for pre-registration tax, the director wanted to change the effective VAT registration date to 4 years prior.

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14th Mar 2019 08:54

Extract above
'The director’s view that he could claim input tax in respect of four years of expenses without accounting for a penny of output tax for sales in the same period was naïve to say the least. '

I think the Directors plan was to claim everything and cross his fingers, hope for the best and prepare for the worst, not the greatest of strategies, he should have claimed for all the Company was entitled and took a view on the rest.

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