HMRC has clarified its position regarding the recovery of VAT on assets owned prior to registration for VAT.
UK law allows a business registering for VAT to recover tax they have incurred on goods and services before their effective date of registration (EDR). This allows the recovery of VAT against goods and services as long as they’re used by the taxable person to make taxable supplies once registered.
Services must have been received less than 6 months before the EDR for VAT to be deductible. This time limit simplifies the rules and means you don’t need detailed calculations of the use before and after your EDR. This excludes services that have been supplied onwards. VAT on services received within the relevant time limit can be recovered in full.
HMRC now states that:
Subject to the normal rules on VAT deduction:
- VAT on services received within 6 months of EDR and used in the business at EDR is recoverable in full
- VAT on stock is deductible to the extent that the goods are still on hand at EDR (for example apportionment may be required)
- VAT on fixed assets purchased within 4 years of EDR is recoverable in full, providing the assets are still in use by the business at EDR
Full recovery only applies if your business is fully-taxable. If you’re partly-exempt, have non-business activities, or need to restrict VAT deduction for any other reason, you’ll need to take that into account when calculating your deductible VAT.
Consequently, if you have only partially recovered VAT on assets owned prior to registration you may be able to recover any balance of VAT paid. If you have made a previous claim it may be advisable to take professional advice to see if any additional VAT can be claimed.