14 11 2016

HMRC Clarifies Rules On VAT Incurred Prior To Registration

The UK tax authority, HM Revenue and Customs, has released a new Brief (16 of 2016) on the treatment of value-added tax (VAT) incurred on assets that are used by a business prior to VAT registration.

This brief sets out HM Revenue and Customs (HMRC) policy on deduction of VAT relating to assets used by the business prior to its VAT registration. It clarifies when, and to what extent, VAT is deductible and what to do if the correct treatment has not been applied.

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 six months before the EDR for VAT to be deductible. This excludes services that have been supplied onwards. VAT on services received within the relevant time limit can be recovered in full.

HMRC also offers a simplified rule for goods. Goods have a four-year time limit for deduction that is consistent with the general "capping" provisions. This excludes goods that have been supplied onwards or consumed before EDR. However, VAT on fixed assets purchased within four years can be recovered in full.

HMRC's policy has not changed, but it has released the guidance in an attempt to ensure that consistent application of VAT rules on assets held prior to EDR.

Guidance in the VAT Input Tax manual and Section 10 and 11 of VAT Notice 700: the VAT guide will be amended to ensure the policy position is clear, HMRC said.