New businesses missing out on reclaiming VAT

Generally, when a business registers it can reclaim VAT paid for goods on hand. There's also scope for reclaiming VAT on services received before registration but tough conditions apply. What exactly are you allowed to claim for?

Reclaiming input tax

You probably know that VAT paid on purchases (input tax) made before registration can be reclaimed. There are, of course, time limits and other conditions; just to recap these are:

The purchases must have been made for the business that's now registered and used to make supplies on which you will charge VAT.

Where the purchase is of goods they must have been made in the four previous tax years.

Where the purchase is of services they must have been made within the six months prior to registration.

Trap. Whether it's VAT on goods or services, they must not have been consumed, i.e. fully used, before the date of registration.

Example - goods. Acom Ltd, a car parts wholesaler, started to trade in April 2012 and registers for VAT nine months later. It makes a list of stock and other assets (desks, IT equipment etc.) on hand at the date of registration and reclaims the VAT it paid on the purchase of these on its first VAT return. The VAT Acom paid on stock purchased and sold before registration can't be reclaimed.

Example - services. Acom also paid VAT on services pre-registration, namely on the rent of its premises, equipment leasing charges, telephone and Internet bills. The rule is that where invoices for these were issued more than six months before registration Acom can't reclaim the VAT. But for the more recent purchases the position isn't clear. Acom must decide whether the services have been consumed at the time of registration. You would think that as this rule has been around for decades the Taxman would offer some sensible guidance on it. But his public notices are vague and if you try to pin him down by contacting his helpline the chances are you'll receive the wrong advice or simply be directed back to his guidance notes.

Has the service been consumed?

Logically, you might think that, for example, once a rental period ends the rent for that month/ quarter etc. has been fully consumed. The same might be said of leasing charges, telephone bills etc. But this is the wrong way of looking at it. Past rent can contribute to post-registration sales on which you'll be charging VAT. So Conditions 1 and 3 for the six months prior to registration are met.

Example. Acom's rented premises includes a storeroom containing stock bought pre-registration, but sold post-registration and on which VAT will be charged. Similarly, pre-registration phone calls will have included those to suppliers to order this stock. This means there's a definite link between these past services and future VATable sales.

Tip 1. Unless it's clear that the cost of a pre-registration service was fully used against supplies made prior to registration, you can reclaim the VAT paid on its purchase. For example, lease charges on equipment that ceased to be used in the business before registration can't be claimed.

Tip 2. VAT on so-called continuous charges, e.g. general bookkeeping and accounting services, count as supplied at the date an invoice is issued for these and not when they are carried out. So VAT paid on invoices for continuous services within six months before registration can also be reclaimed. Make sure you don't miss out!

VAT paid on services in the six months prior to registration can be reclaimed as long as these haven't been fully used by that date. This condition is met where the service can be shown to contribute in some way to post-registration sales. Therefore, VAT on rent, telephone, Internet and bookkeeping services may qualify.

If you need any help or advice on VAT, dont hesitate to get in touch to organise a free initial meeting 0191 386 4786

New businesses missing out on reclaiming VAT

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