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Reclaiming pre-trading VAT

20 June 2024

There are special rules that determine the recoverability of VAT incurred before a business registered for VAT. This type of VAT is known as pre-registration input VAT.

Special rules exist to determine the recoverability of VAT incurred before a business registers for VAT. We refer to this type of VAT as pre-registration input VAT. Different rules apply to the supply of goods and services, but a business can only reclaim VAT if the pre-registration expenses are related to the supply of taxable goods or services by the business that has newly registered for Value Added Tax.

The time limit, which is backdated from the date of registration, is as follows:

  • 4 years for goods on hand, or that were used to make other goods on hand; and
  • 6 months for services.

A business should reclaim the pre-trading Value Added Tax input tax on its first VAT return. When applying for a new VAT registration, there is an option to backdate the registration (known as the effective date of registration). Businesses should consider this option if it will make additional input tax recoverable.

Special rules apply to partially exempt businesses, businesses that have non-business income, and the purchase of capital items within the capital goods scheme.

HMRC’s internal guidance on the issue offers interesting examples. One example involves an individual who bought a van for wholly private purposes. Three years later, the individual registers for VAT and uses the van exclusively for their business. The Value Added Tax incurred on the purchase of the van is not recoverable because the individual was not conducting business activities at the time they bought the van.

Source: HM Revenue & Customs Tue, 18 Jun 2024 00:00:00 +0100

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