In 2011 Hmrc changed its guidance on how much pre-registration VAT businesses can reclaim.
However, in November 2016 it issued a statement saying its revised guidance was wrong.
What is the position now?
HMRC guidance manuals are supposed to provide in depth information about the tax rules, primarily for staff but also for the public – especially accountants and tax advisors.
They are mainly accurate and factual but occasionally some rogue advice creeps in, as was the case regarding advice on VAT paid on purchases made before registration.
2011 new advice
For a long time the accepted view was that a business could reclaim 100% of the VAT it had paid on purchases (input tax) of equipment it had made before it registered, subject of course to conditions.
In 2011 HMRC updated its guidance in a way that seemed to be a change of approach. It said that the amounts of VAT that can be recovered should reflect the use of purchases for the period “before” registration.
For example, in May 2012 Kevin bought a van for his business which cost £15,000 plus £3,000 VAT. He also used the van for private journeys 30% of the time.
In March 2016 Kev registered for VAT. Under HMRC original guidance he would have been able to reclaim all of the £3,000 VAT but according to its 2011 advice Kev should reduce this by £900 and reclaim just £2,100 – that’s £3,000 minus 30%.
HMRC’s revised view of pre-registration VAT wasn’t common knowledge until early in 2015, at which time it caused a stir. So much so that the Institute of Taxation made representations to HMRC asking for an explanation.
It responded by saying it hadn’t changed the policy and in November 2016 it issued a statement to that effect.
The 2011 guidance had been badly worded. In other words 100% reclaim of the VAT is possible, regardless of the pre-registration use of the asset.
Naturally HMRC isn’t gracious enough to admit its error, even though it clearly accepts there was one.
Here’s a tip. HMRC’s statement says that if, in the past four years, you restricted a VAT claim for non-business/exempt use in the period before registration you can correct it.
So in our example Kev might now be entitled to reclaim the £900 he paid in May 2012 even though it is beyond the normal four year time limit allowed for VAT claims. This is because the time limit runs from the date he registered – ie March 2016.
In setting the record straight HMRC also correctly pointed out a post-registration non-business or exempt use of purchases will affect the amount of VAT that can be reclaimed.
For example, Kev’s non-business use of the van up to the date it was registered was 30% but after that date, because of a change in his business, he expected it to reduce to just 10% which he has proved to be the case.
Therefore, he is entitled to reclaim some of the £900 he didn’t originally, but not all of it. He must restrict it to post-registration non-business use so he can now reclaim a further £600, not £900, of VAT. That is £3,000 minus 10% which is £2,700, less already claimed £2,100 equals £600.
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