As many of us know, it should be possible to recover VAT on goods on hand at the date of VAT registration if they were purchased 4 years or less before the date of registration. The time limit for services is six months. HMRC even allowed VAT to be recovered before incorporation if for example, the supply was made to a person who was later to become a director of the company. In cases where the business can only recover part of its VAT, it is necessary to restrict VAT recovery, but otherwise full VAT recovery was available. This certainly seems to be what HMRC state in public notice 700 (Section 11).

Quite straightforward you might think – until HMRC sneakily inserted something into their internal manuals (VIT32000) a few months ago. This states as follows:

‘You must also take into account any use that has been made of the goods or services prior to registration’.

The manuals then gives the following example:

‘A business that is trading below the registration threshold acquires a van. After three years the business registers for VAT. The van is still on hand at the effective date of registration. The van has been used to make supplies that were not subject to VAT. The amount of VAT that can be recovered … should reflect the use of the van for making supplies before registration’.

Despite a number of Tribunal cases suggesting that full VAT recovery is available, we have started to see HMRC officers seeking to restrict VAT recovery of pre-VAT registration costs. No guidance has been given as to how the restriction should apply. We have seen cases where HMRC has suggested that useful economic life for fixed assets could be used for such an apportionment. The position for services appears much more arbitrary, and for services such as rent which may have been fully ‘consumed’ before registration, this could result in HMRC seeking to restrict all the VAT.

The best advice must be not to rely on pre-registration VAT recovery and seek to register for VAT as early as possible.

Seems that HMRC have changed the rules without telling anyone! If this is likely to impact your business please be in touch.