HMRC clarify their position on VAT incurred pre-registration

In Brief 16/2016 HMRC have clarified their position on claims for VAT incurred on assets used by a business prior to VAT registration.  Previously, in some circumstances, HMRC sought to disallow an element of such input tax.

HMRC now accept that VAT incurred on fixed assets purchased within four years of a business’s effective date of registration (EDR) is recoverable in full, providing the assets are still in use by the business at the time of EDR. This statement now brings the VAT treatment into line with what many VAT advisers always thought the position to be, and in line with the policy that HMRC had applied until recently – although in the Brief HMRC state that there has been no policy change.

The rules are that services must have been received less than six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards pre EDR. There may be a restriction on VAT recovery if a business is partly exempt. For goods purchased within four years of EDR and are still on hand at the time of EDR, VAT may be recovered in full (again subject to any partial exemption restriction). Input tax on goods which were consumed or sold prior to EDR do not qualify for recovery.