VAT: HMRC incorrectly rejects registration applications
HMRC is automatically rejecting some applications for a VAT number if the business says it will make no sales in the next 12 months, but this is contrary to VAT law.
A business must complete form VAT1 to register for VAT. There is a question on the form that requires the owner to give the estimated value of taxable supplies in the next 12 months. Another question requires a tick if the business wants to register as an intending trader.
An intending trader application means there will be a time gap between the start of new business and the date when it makes its first sale.
The Association of Taxation Technicians (ATT) is aware of cases where HMRC refused to register a business for VAT if it entered ‘nil’ as the answer to the first question on the VAT1, despite ticking the box for the second question. This is an incorrect interpretation of the law.
If a business has a genuine intention to make taxable supplies and can provide evidence to HMRC if requested, the delay in making sales is irrelevant. There is no time cap in the legislation as to when the first supply must have been made.
Examples of delays over 12 months
I was asked if there were any businesses that would take longer than 12 months to make sales and I gave two examples. In both cases, VAT registration can be applied for as soon as an intention to trade takes place:
- A person buys a plot of land, with a view to building a dwelling on it to sell for a profit. This is an expected zero-rated sale that will be made in the course of business. The project might take many years, depending on how quickly the owner cracks on with the work and then finds a buyer.
- A business buys land, with a view to growing trees and selling timber. How long might that intention last – ie when will the trees be fully grown? There could be up to 20 years of zero entries in Boxes 1 and 6 of the VAT returns before sales of timber are made.
By coincidence, the HMRC guidance (VIT22000) on intending trader issues quotes the example of the forest:
“Some types of business will incur VAT on legitimate trading expenses before they make any supplies. For example, in forestry VAT is incurred on the purchase of saplings, groundworks and planting many years in advance of the intended supplies of timber. In these circumstances the VAT incurred is recoverable in the normal way.”
The VAT Input Tax manual also contains a very thorough list of evidence that can be provided to HMRC to support an intending trader application.
What happens if a good business idea, which starts with the owners full of hope and optimism, fails to take off with time and costs wasted and no sales are ever made? The good news is that as long as there was a genuine intention to make business and taxable supplies, the input tax claimed up until the time the business is aborted does not have to be repaid to HMRC (see VAT Notice 706, para 13.14)
Was there ever a business?
To complete the loop, the worst scenario is if HMRC decides, after many years of receiving VAT returns claiming input tax and paying no output tax, that there has never been a business intention in place. In other words, the owners have been pursuing some private or non-business project and incorrectly claiming VAT.
In this situation, an HMRC officer would be justified in disallowing input tax retrospectively and cancelling the VAT registration, with the usual powers of assessment going back four years. See my October 2019 article: How to test whether a business is viable
If you have clients whose request for an intending trader VAT registration is rejected by HMRC, then the next step should be to send an appeal to the email address for new VAT registrations: [email protected] . This email should include details of why the first sales may be delayed and the reference number provided in the registration rejection letter