Time and time again during a HMRC investigation we come across problems in trying to claim VAT on pre-registration goods and services.
It was not helped by the fact that in 2011 HMRC changed its guidance on how much pre-registration VAT could be reclaimed.
In November 2016 HMRC issued a statement saying its revised guidance was wrong.
So, it would be good to know what is actually the position.
Well for most parts, businesses were thought to be able to reclaim 100% of the VAT it had paid on purchases of equipment it had made before being registered, subject, as usual of course, to conditions.
The problem arose in 2011 HMRC seemed to have changed their opinion in an updated guidance issued then.
What they said was:
“The amount of VAT that can be recovered should reflect the use of purchases for the period ‘before’ registration”.
Now, what on earth does that mean?
Well as an example let’s say that a chap bought a van for business use costing £10,000 plus £2,000 VAT, sometime in 2012. He used the van for private journeys about 30% of the time but it wasn’t until 2016 that he registered for VAT.
Under the original HMRC guidance he would have been able to reclaim all of the £2,000 VAT, but according to the 2011 advice that would be reduced by £600 and the reclaim would be just £1,400 – that is £2,000 minus 30%.
So, what did the 2016 notice tell us about this?
HMRC’s revised view of pre-registration VAT wasn’t common knowledge until early in 2015 – not very helpful one would add, very little publicity so to speak. In fact the Institute of Taxation made representations to HMRC asking for clarification.
HMRC responded by saying it hadn’t changed the policy and in November 2016 issued a statement to that effect.
Needless to say, the 2016 guidance had been badly worded. In other words, 100% reclaim of the VAT is still possible regardless of the pre-registration use of the asset, confusing matters even more so.
Unfortunately, I have never known HMRC to admit to their wrongs. I think I have obtained, in 40 years, one letter of apology from HMRC. However, in this case HMRC clearly accepts that there was an error on their part.
It is now clear that, if in the past four years you restricted a VAT claim for non-business/exempt use in the period before registration, you can now correct it – so there is a remedy.
For instance, our chap might now be entitled to reclaim the £600 he paid in 2012, even though it is beyond the normal four year time period allowed for VAT claims. This is because the time limit runs from the date of registration – in other words some time in 2016 so it will run out in 2020. Therefore, he has ample time to make the additional claim.
When HMRC were correcting their mistake they were clear to point out correctly that a post-registration non-business or exempt use of purchases will affect the amount of VAT that can be reclaimed. That’s normal practice, nothing wrong there.
In other words the non-business use of the van that we are using in this example, up to the date of registration, was 30% but after that date, because of a change in the business, it was reduced to just 10%, which proved to be the case.
Therefore, he would be entitled to reclaim some of the £600 he didn’t originally claim, but not all of it. He must restrict it to the post-registration non-business use so he can now reclaim a further £400, not £600, of VAT. That is £2,000 minus 10% which is £1,800, less already claimed £1,400, leaving a balance of £400. So, he can actually recover a little more VAT.
So there we are. That matter is always brought up by HMRC during their investigations, as indeed there are other things.