How much VAT can you claim back for expenses before you became VAT Registered?

You don’t have to wait till you hit the £85,000 threshold to register for VAT, you can voluntarily register even before you make your first taxable supply (sale). You can even back date the registration!

VATREG21550 – Voluntary registration: intending traders: what is an intending trader?

An intending trader is a person who, on the date of the registration request:

  • is carrying on a business
  • has not started making taxable supplies
  • has an intention to make taxable supplies in the future.

Intending traders normally seek registration from a current date in order to reclaim input tax incurred in the setting up and development of their business. In some cases, the amounts involved may be substantial and cover a long period of time.

VATREG21650 – Voluntary registration: intending traders: requests from an intending trader for retrospective registration

Requests for backdating an EDR in cases of voluntary registration can only be considered at the time of initial application: see VATREG21150.

When you are considering such requests, traders must be able to provide evidence that they would have satisfied us at the time (that is, the earlier date requested) that they had a firm intention to make taxable supplies.

What Evidence is needed?

Examples would include

  • potential contracts
  • planning permission
  • items purchased for the business
  • patents applied for
  • application for option to tax land or buildings

What about new companies?

Companies don’t exist until they are formed (incorporated), so they can’t be registered until they exist, but you can still claim for pre-trading expenses, subject to the rules in the next few paragraphs. The VAT is reclaimed by submitting an expense claim to the company on the day the company was created (incorporated).

Purchases made before registration

There’s a time limit for backdating claims for VAT paid before registration. From your date of registration the time limit is:

  • 4 years for goods you still have, or that were used to make other goods you still have
  • 6 months for services

You can only reclaim VAT on purchases for the business now registered for VAT. They must relate to your ‘business purpose’. This means they must relate to VAT taxable goods or services that you supply.

You should reclaim them on your first VAT Return (add them to your Box 4 figure) and keep records including:

  • invoices and receipts
  • a description and purchase dates
  • information about how they relate to your business now

Personal Use

If the purchases have a element of personal use that must be excluded.

For example a mobile phone acquired before the business started or not on a business contract used for personal and business, only the business proportion can be claimed on your VAT return.

If the phone subsequently is replaced with a business contract then the whole cost can be claimed.

What Goods can the 4 year rule be applied to?

A good example would be Stock or Work in Progress and to support your claim you would need

  • Quantities and Descriptions
  • Invoices
  • Details of how they relate to your business now

Fixed Assets would also qualify, for example

  • Computers
  • Desks
  • Office Equipment

However, VIT32000 states a business may not use regulation 111 to recover VAT on supplies that were purchased for non-business or private purposes. The expense is not a business cost and no VAT can ever be recovered, regardless of any subsequent business use. This principle was confirmed in the case of Waterschap Zeeuws Vlaanderen (see VIT62520). For example:

  • an individual buys a van to use for wholly private purposes. Three years later the individual registers for VAT and uses the van exclusively within their business. The VAT paid on the van is permanently outside of the VAT system because there were no business activities at the time the van was bought. The VAT paid on the van can never be brought back in under the terms of regulation 111

What about the 10 year Capital Goods rule?

For capital items within the Capital Goods Scheme and acquired after 1 January 2011 there are different rules.

Capital items are defined as:

  • Land, buildings and civil engineering work or capital expenditure in relation to the same including construction, refurbishment, fitting out, alteration and extension, where the value is more than £250,000 (Land); or
  • Ships, boats or other vessels and aircraft including capital expenditure in relation to the same of construction, refurbishment, fitting out, alteration and extension, where the value is more than £50,000 (Ships and Aircraft); or
  • Single items of computer hardware where the value is over £50,000 (Computers).

Where the goods or services acquired prior to registration are capital items and when the business registers on or after 1 January 2011, even in cases where the registration is backdated to an earlier date, the normal regulation 111 time limits of six months for services and four years for goods on hand may not apply. Instead a business may be able to recover VAT incurred up to ten years prior to registration in respect of land and up to five years prior to registration for other capital items.

What counts as Services?

Examples could include

  • Subcontractors
  • Professional Services from Accountants and Lawyers
  • Software
  • Rent of Premises
  • Telephone and Internet
  • Equipment leasing

The main problem is deciding whether the services have been consumed/used up before registration for example Rent – the rental period could be expired before registration in which case it can’t be claimed (however that might not apply to warehouse holding stock or rent paid in advance). The same issues apply to Telephone and Internet – was the cost to generate future work or past work. In fact most types of service need to be carefully examined as they could be past or future, only those relating to period after registration can be claimed as these costs haven’t been ‘Consumed’.

In order to qualify

  1. The services must be for the business now registered for VAT
  2. Supplied for the purpose of the business and relate to taxable/Vatable activities (ie not exempt activities)
  3. Not related to goods consumed/disposed of before registration, for example if the subcontractor worked on a project sold before the Effective Date of Registration then you can’t claim it

steve@bicknells.net

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