Understand Pre-Registration VAT Claim on Purchases

Claiming pre-registration VAT can be a tricky process as HMRC’s Guidance isn’t very transparent. That’s why our team of accountants have created this mini guide to ensure you are aware of everything you need to reclaim all the VAT you’re eligible for. 

If you are new to Business VAT or if you would like more information, we recommend that you read our guide to Understanding VAT for your business before reading further. 

What does HMRC’s guidance update say about claiming Pre-Registration VAT? 

HMRC periodically issues guidance manuals that provide useful tax guidance for business, however mostly these need to be interpreted with the help of an accounting firm. Although these manuals are very comprehensive, the problem arises when, in an effort to be thorough, HMRC adds extra information which can be misconstrued. As was the case with their guidance on VAT paid on purchases made before VAT registration. 

Due to the language in the guidance, most people believe that they should be able to reclaim 100% VAT on purchases made, even before their business was registered for VAT. In 2011, HMRC issued an update to their VAT guidance to remedy this misunderstanding. The 2011 update stated that the recoverable amount of VAT should be based on the use of purchases made for the business.

Example- In February 2012, Terry purchased a van for  £20,000 inclusive of VAT. Four years later, Terry registered his business for VAT. At that time Terry disclosed that he used the van for personal use for 40% of the time, before registering for VAT. Terry listed his business van on his VAT return and filed for a refund. Under the previous guidance, he would have been able to claim all £4,000. However, under the 2011 update, Terry will only be able to reclaim £2,400, which is based on the business use of the business before the pre-registration.

Video: VAT Registration The Pros and Cons

A Guide about Pros and Cons Of VAT Registration, how to Reclaim and how to cancel your VAT Registration.

How did HMRC clarify the previous guidance update?

Until 2015, the pre-registration VAT clauses were not well known to the general public. 

This caused such an uproar that the Institute of Taxation demanded that HMRC provide further explanation. In November 2016, HMRC issued a statement that no policy changes were made in the 2011 update. HMRC admitted, in not so many words, that the 2011 guidance was incorrectly worded, and it implied that businesses can reclaim 100% of VAT regardless of the use of the purchase prior to registration. 

Example: Terry can reclaim the additional £1,600 he paid in February 2012, even after the four-year time limit has passed, as the time limit starts from the date of registration. 

What else do you need to know about Post VAT Registration?

Another thing that businesses need to keep in mind is that after VAT registration, non-business or exempt use of purchases will affect the amount of VAT that can be recovered for the pre VAT registration period.

Example- Before registering for VAT, Terry used the van for personal use, 40% of the time. However, after registration, Terry reduced his personal use of the van to 10%. This allows him to claim some of the £1,600 which he didn’t originally reclaim. So he can now reclaim an additional £1,200 of VAT (£4,000 – 10% = £3,600 minus the £2,400 he has already claimed = £1,200).

Related: Did you know that VAT refund rules changed in 2019? Learn more about the new rules by reading our article.

Clear House Accountants are highly qualified Accountants in London with years worth of experience working with clients to help them get their VAT done right.  Our team of VAT Accountants have the right skill and experience to help business maximise VAT claims in line with the rules and regulations.

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