Q – Our business will have to register for VAT in the next two months. What VAT can be reclaimed on purchases made before registration?

A – The basic rules on whether VAT can be reclaimed, seem quite simple. Any goods on hand at the time of registration, for which you hold a VAT invoice, can be reclaimed up to 4 years before the date of registration. Any VAT on services, which relate to supplies after registration, can be reclaimed up to 6 months prior to registration, again if you hold a VAT invoice. The goods or services purchased must have been for the business, and HMRC say that a claim must be made on the first VAT return, but can allow a claim up to 4 years later.

This means that VAT incurred on any goods which are sold before registration cannot be reclaimed. For services, the 6 month period is for simplification purposes deemed to be when services relate to taxable supplies after registration. The exceptions to this are where the service purchased is performed on goods and those goods are sold before registration or the services are supplied themselves, prior to registration.

A common, and often costly error, can occur when building work is undertaken prior to registration. For example, a builder, for example, constructs an extension 1 year prior to registration. You have the physical extension on hand so assume you have been provided with a supply of goods. In fact, from a VAT point of view, what has been provided are builder’s services, and are such are restricted to the 6 month rule. However it would be possible to avoid this if the registration was voluntary and the application to register was backdated so that the builder’s services supplied came within the 6 month rule. Backdating however must be made on the original application to register.

If a business is partially exempt only the VAT on costs which relate directly to taxable supplies can be reclaimed. Any costs which relate directly or partially (such as overheads), to an exempt supply, cannot be reclaimed, even if all the other criteria are fulfilled.

Finally a quick point on pre-incorporation as often a sole proprietor will decide to incorporate the business. The rules on this differ from normal pre-registration input tax recovery, in that VAT recovery is generally limited to expenses incurred in setting up the Limited Company. Any goods on hand owned by the sole proprietor would be deemed to be supplied without a VAT invoice (as the sole proprietor was not registered), so no input tax recovery can be made.

To avoid this, the sole proprietor himself could register, reclaim VAT on any pre-registration expenses and then immediately transfer the business (as a going concern) to the Limited Company.

As is always the case with VAT, it pays to take advice, so it’s worth using the Helpline on 01455 852 555.