Reclaiming VAT from before VAT registration

[Anastasis]

Hi, according to the HMRC website it says that when registering for VAT (which I assume applies whether compulsory because of passing the threshold or voluntary registration) a company can reclaim VAT paid on goods
and services purchased before registration.

For goods, this is 3 years, for services, this is 6 months - see www dot hmrc dot gov dot uk /vat/reg-reclaim.htm (sorry not allowed to post URLs yet )

However, I am confused because I would assume that if doing that the HMRC are also going to want you to pay the VAT on all goods and services you as a company have sold during the same periods. But it makes no mention of that.

Does that mean that you can reclaim on goods and services purchased before registration as outlined above but not have to pay on goods and services sold? It seems very unlikely to me, so where does it explain the contrary?

Please can someone explain and put me out of my misery.

Thanks in anticipation!

 

[DIY Accounting]

A business becomes liable to pay the vat output tax on sales when sales reach the vat threshold.
If you have registered for vat then you are able to go back and claim vat input on your purchases within time limits however you may only recover VAT you incurred before registration which is attributable to making taxable supplies.

And if you do go back and claim the input tax you would be expected to declaree and pay the vat output tax on those taxable supplies.

 

[Philip Hoyle]

You can reclaim input VAT on purchases of stock and equipment that you had in hand as at the eventual date of registration. You can't claim the input VAT on any stock or equipment already disposed of before that date. Therefore, you need to do a full stock take as at the VAT registration date. You don't have to account for any VAT on sales before your VAT registration date, but neither can you reclaim the input VAT as you have already sold those items.

 

[Anastasis]

Many thanks for your help and explanation on this Terry and Philip.

It's odd though isn't it that HMRC tell you all about you can reclaim VAT paid before you were registered - as at the location I listed - but tell you nothing about the flip side?!

This being the case, I have two more related questions:

1. Can you decide how far you want to go back and reclaim within the upper limits HMRC set? What I mean is if we only wanted to reclaim for the last 3 months, providing we also pay the VAT on things we have sold during the same period, can we do that?

2. How long from applying for VAT does it take to be declared as 'registered' and therefore in a position to both charge VAT and reclaim it against purchases for the business?

 

[Anastasis]

You don't have to account for any VAT on sales before your VAT registration date, but neither can you reclaim the input VAT as you have already sold those items.

Philip - re-reading your answer I think I am a little confused by this last sentence. Apologies!

As I (think I) understand it, "input tax" is VAT that you pay on purchases.

Please can you clarify: you are saying that if you do one, (e.g. reclaim VAT on purchases) then you must also do the other (i.e. pay VAT on sales)?

Sorry, if I'm being a bit dim on this. :|

 

[DIY Accounting]

1. Can you decide how far you want to go back and reclaim within the upper limits HMRC set? What I mean is if we only wanted to reclaim for the last 3 months, providing we also pay the VAT on things we have sold during the same period, can we do that?

Yes you could go back 3 months but remember that after registration and sometime in the next couple of years you will receive a vat inspection, and much earlier if you claim a refund and it is loikely that your first quarter would be one of those selected for inspection.

During that vat inspection you could expect the inspector to take a very strict view on items claimed and declared before registration and he would be looking to match claims for input tax against the liability for output tax on sales so it is often not beneficial.

the area it may be beneficial is when assets have been purchased and still being used in the business after registration.
You could claim vat on stock bought and resold but for example you cannot cliam vat on say petrol bills.

2. How long from applying for VAT does it take to be declared as 'registered' and therefore in a position to both charge VAT and reclaim it against purchases for the business?

When you fill in the appliocation form you advise when you wish to be registered from and you should receive the registration within say 4 to 8 weeks but this can be variable and can be dependent upon your type of business. There are recent posts on this subject where people have waited months and months for registration

 

[Anastasis]

Thank you Terry. So it seems that there's no real win with HMRC on this - as you would expect! If you are in a positive position the HMRC make jolly sure you work hard to get it!

When you fill in the appliocation form you advise when you wish to be registered from and you should receive the registration within say 4 to 8 weeks but this can be variable and can be dependent upon your type of business. There are recent posts on this subject where people have waited months and months for registration

So on this, if we were, for example, to register online tomorrow and stated on the application form that we wanted to be registered from, say, 1st August, even though we won't receive our registration for 4-8 weeks afterwards, can we be operational from 1st August in terms of paying and claiming VAT? If so, what would we do about the VAT registration number and having that on invoices etc if we do not get the registration details back until after our elected "registration from" date?

 

[Jenni384]

And if you do go back and claim the input tax you would be expected to declaree and pay the vat output tax on those taxable supplies.

Terry, I'm confused by this statement.
When a business registers for VAT, they can claim 'pre-registration input VAT' of goods 3 years still in possession and services 6 months.
I've not heard of having to match these to sales and declaring and paying over output tax pre-registration. Surely there is no output tax pre-registration as they weren't registered? If I've misunderstood your statement then forgive me and I'll go make a cup of tea

Anastasis,
The claiming of pre-reg input VAT is a 'freebie' from HMRC, but, as Terry points out, make sure it's properly documented and you can prove all goods were in your possession at the date of registration. The flip side to the freebie is that, lets say you find £1000 of pre-reg input VAT to reclaim. You have now reduced your expenses by £1000, and so your profit chargeable to income tax and Class 4 NI (if a sole trade/partnership) or corporation tax (Ltd co) is now higher by £1000. Assuming a tax rate of 20% you will owe £200 more income tax. The pre-reg claim is still worth doing as it's cash flow and £1000 in your pocket in a matter of months.

A business can only charge and pay VAT over to HMRC when it has a VAT number, lets say 1st august is your registration date. Every invoice you raise must charge VAT (or rather, the value of the invoice must include the VAT amount, though you can't call it VAT) and you write 'VAT number applied for' on the invoice (once you're registered you write your VAT number on the invoice). Once you have a VAT reg number, re-print the invoices showing the VAT breakdown and your VAT number and send them to your customers. Your customers can now reclaim the VAT you've charged on their own VAT returns.

 

[Anastasis]

Jenni

Thank you for your very clear reply on this. Much appreciated.

 

[3pic]

Anastasis,

Between Jenni (hiya!) and Philip you have the answers.

You register (vol or comp) from say 01 June 2008.

For your sales pre-June, there is no need to account for output tax on those sales at all. Any invoices raised after June must have VAT shown (but this assumes you have a VAT number - more on that later).

For your expenditure, you can reclaim any VAT you have incurred if you still have the item in stock/in use. So if you bought a laptop/furniture then you can reclaim all that VAT. If you have stock and you've sold half of it, then you can only reclaim half the input tax. You in no way have to account for output tax on ANY of your previously sold goods in order to reclaim the input tax incurred from pre-registration. It is, as has been noted here, a freebie - and a very valuable one at that.

Teh reason why you don;t need to charge output tax on previous sales is because you'll be interfering with time of supply rules. If you sold an item in Jan08 and invoiced in Jun08 for the VAT you cannot create a VAT taxpoint 6 months later in June 08 just to reclaim the input VAT (hence why you don't have to!).

For services, you can only go back 6 months - and any construction/property refurbishment works are services, not supplies of goods (even though they are physical buildings if you know what I mean).

Back to VAT registration. If you apply to be regsitered from June 08 then whilst it may take a few months to get a VAT number, you must account for VAT from June 08 onwards and as Jenni has stated in her post, you have to include the VAT as a single price and state "Not a VAT invoice" and then when you do get a VAT number you then issue a VAT only invoice to the customer.

For example :- When unregistered you sell item for £100. Once you apply for registation you would have to charge £117.50 and then when you get the VAT number you'd invoice client for £17.50 (you'll already have got the £117.50 into your bank, now you have to pay over the VAT element of £17.50, so the VAT only invoice creates the audit trail for you).

As a final 'tip', if you choose to go on the flat rate scheme, the scheme does not allow the recovery of input tax post registration (as the difference between 17.5% and your flat rate % is your 'recovery'), however, you can still reclaim input tax incurred pre-registration in full (assuming you are a fully taxable trader) and subject to the same rules as above. So an even better win for some.

I trust that all makes sense.

 

[Jenni384]

Hi 3pic

Thanks, it's great to have a VAT expert on board to clarify this stuff

 

[DIY Accounting]

make sure it's properly documented and you can prove all goods were in your possession at the date of registration.

That is the essential point about claiming input tax pre-registration. The fact that you are only claiming vat inputs on goods that will be sold in the future with vat added.

You don't claim on pre-registration consumable expenses that have been used but you can claim for items bought that will be sold with vat added after registration.

 

[3pic]

That is the essential point about claiming input tax pre-registration. The fact that you are only claiming vat inputs on goods that will be sold in the future with vat added.

You don't claim on pre-registration consumable expenses that have been used but you can claim for items bought that will be sold with vat added after registration.

Terry,

I'm not so sure I understand your point here > "the fact that you are only claiming vat inputs on goods that will be sold in the future with vat added".

I think I know what you mean but to a non-VAT person it suggests you can only reclaim input vat on goods you buy in which you intend to sell on with VAT on. That is not strictly the case.

If the OP buys 6 vans, tools, a £2m factory and fits it out with machines and robots and incurs legal, architectural and accountancy costs before registration, the OP can reclaim the VAT on ALL of that expenditure within the prescribed 6 months for services and 3 years for goods - on the basis they INTEND or have made taxable supplies. If they have incurred such expenditure, they will have such invoices and sufficient evidence to claim and is not based upon them only reclaiming the input VAT on goods they itnend to sell.

A person can purchase a laptop with their own money and provided they reclaim the cost back from the company via an expenses claim, such a personal purchase will now become a business overhead and the input tax recoverable by the business...provided it can be shown the laptop is used wholly for the business of course.

Don't mean to have a go, it is Friday, it is hot, but if I've learnt one thing about VAT over the last 12 years is that you cannot afford to be general or vague in explaining it - (check back on my previous posts, they're not exactly one liners!) and that is because VAT can be complicated, certainly to a non-VAT person, as they will take what is written and assume that is that, when that is not the case at all.

 

[DIY Accounting]

If the OP buys 6 vans, tools, a £2m factory and fits it out with machines and robots and incurs legal, architectural and accountancy costs before registration, the OP can reclaim the VAT on ALL of that expenditure within the prescribed 6 months for services and 3 years for goods - on the basis they INTEND or have made taxable supplies.

Yes I agree you can reclaim the vat on assets you have bought and still possess that are to be used to generate future business within ther 3 year guideline.

 

[Anastasis]

Thank you all for your fantastic responses and very kind help in explaining all of this. I am not bad at numbers and stuff like that but am certainly not an accountant or VAT expert, so it is very helpful to hear from those who are - and most importantly when the explanation is written in such a way for a layman like me to understand.

3Pic - your detailed answers have been terrific and very clear, but just one question on something you said earlier:

As a final 'tip', if you choose to go on the flat rate scheme, the scheme does not allow the recovery of input tax post registration (as the difference between 17.5% and your flat rate % is your 'recovery'), however, you can still reclaim input tax incurred pre-registration in full (assuming you are a fully taxable trader) and subject to the same rules as above. So an even better win for some.

Sorry, you have lost me on that one - please could you explain it again? It sounds important being a 'tip' and an 'even better win for some' so I want to understand it.

The fact that you can claim back the VAT on prior purchases of goods and services for the time specified does seem something we ought to do. It is a little concerning though about having the VAT Inspector descending on us and wanting to nit pick there way through everything. Not that we have anything to hide - it might be difficult saying sorry you can't see the £2m factory today - I wish - but it is a case of balancing what we could reclaim in value against the hassle factor.

It is probable that it could be worth it, but any feedback on experiences of what it is like to have the VAT man come round for tea would be appreciated too.!

 

[Jenni384]

Anastasis,

If you are VAT registered, it's highly likely the VAT man will come to have a look at some point, so the hassle factor of an inspection is always possible. It's just one of those things. With that in mind, as long as you keep your records in a methodical and clear fashion, claim everything you possibly can within the rules.

Flat rate VAT means simpler record-keeping. You can claim pre-reg input VAT as previously detailed, but then it changes. You still charge VAT on your sales as normal, but you can't reclaim any input (purchases) VAT. Instead you pay a flat rate over to HMRC. The rate is determined by your industry. For example accountancy is 13% and photography is 9.5%. You hand over this percentage of your total turnover including VAT. The percentage is meant to reflect the amount of VAT you'd pay over with the normal system taking into account your industry and the amount of input VAT you'd typically reclaim.
Sometimes you're better off doing it this way, other times you pay over slightly more VAT but have simpler bookkeeping (though with good accounting software I'm not convinced it's that much more simple as the software automatically records VAT anyway).

Details here and here.

There's a recent thread about VAT investigation here, have a look for peoples' experiences.

 

[Anastasis]

Thanks Jenni - that's perfect, and I understand 3pic's reference to that now.

I can see that a flat rate setup could work in our favour for now. Even better, as 3pic suggested, we can still claim back the tax paid previously.

 

[Mrs Lubna Alvi]

My query is similar that fuel, building maintenance and utilities are vital part of our work [recycling used clothing) so can it be claimed under "for goods you still have, or that were used to make other goods you still have" ? I got registered in 2014 but was in business from 2012 and have paid VAT on fuels, utilities and similar items prior to registration, can I claim all them while they paid via bank? thanks in advance

 

[JCresswellTax]

Hi 3pic

Thanks, it's great to have a VAT expert on board to clarify this stuff

VAT expert? Where?

 

[tasmanialtd]

Seems to me she wanted to know that if you can reclaim during the period BEFORE registration do you also have to PAY for those goods/services as well. The answer is NO. It is a great option to be able to reclaim before registering. That is my experience.

 

[spidersong]

I'm not quite sure what the answer from tasmanlaltd is trying to say, but it is the case that you can only recover VAT on goods where you a) still have the things on hand at the date of registration and b) will be using those things in the course of making taxable supplies. So you can't claim VAT back on things that won't be being used for things you will pay VAT on, or for things that you've sold without VAT on before registering.

However more important to your query are a number of points:
a) VAT law says fuel and similar utilities are supplies of goods, so you'll only be able to get VAT on those back if they relate to supplies that hadn't been consumed by the time you registered.

b) you say you registered in 2014 and traded since 2012, the date of your first return will be quite relevant, as these are supplies before registration they should be claimed on your first return. If you didn't then you'd in essence be correcting that first return and you only have 4 years from the end date of the return to do this, so if your first VAT return was for August 2014 or before then you've missed the boat on pre-registration recovery.

c) you mention building maintenance - that is a service even if the builder put in bricks and mortar or new door etc. and so those can only be recovered if they were supplied within six months prior to your date of registration.

 

[Mrs Lubna Alvi]

Seems to me she wanted to know that if you can reclaim during the period BEFORE registration do you also have to PAY for those goods/services as well. The answer is NO. It is a great option to be able to reclaim before registering. That is my experience.

Hi . Thanks for replying. in deed my query is little sever, I hope you might help.

1. My VAT recording person was so incompetent and she missed many many receipts and payments, so my VAT claim was far less then actual. in 2017 I took over myself and realised that VAT returns are not accurate at all. I started work to digging in and found a total mess. now as VAT reclaim bill is big enough, VAT inspection is arranged. I do have all bank statements and i am cleaning my mess with all nitty grity. just want to get advice.

1. Can I claim from 2013 while register in 2014, for all fuels and utilities etc?
2. As company is in closing down process can my final claim will may include any outstanding VAT 2014 till to date?

 

[Mrs Lubna Alvi]

added to above

Tax man will be looking in my VAT [quick books ] figures only or all my in and out? any idea . my first sitting with them

 

[Scalloway]

Can I claim from 2013 while register in 2014, for all fuels and utilities etc?

You can go back 6 months from now for services.

Tax man will be looking in my VAT [quick books ] figures only or all my in and out? any idea . my first sitting with them

They will need to see the back up to your VAT returns - The lists of invoices that make them up and the actual invoices.

 

[JohnAW]

Could I add a question to this topic: What about reclaiming VAT from equipment purchased from other EC Member States, and from equipment purchased from China and Taiwan before registration? On gov.uk's /reclaim-vat page it says you can not reclaim VAT from purchases from other EC Member States, but I get the impression that this summary does not take pre-registration VAT claims into account. Other EC Member States are not specifically mentioned on gov.uk's /vat-registration/purchases-made-before-registration page or anywhere else that I have seen.

 

[Scalloway]

According to this page from the ICPA there is no provision for recovery of pre- registration input tax incurred in other member states.

https://www.icpa.org.uk/portal/vat/pre_registation_input_vat_from_european_supplier

Did you get C79 certificates when you imported the goods from outside the EU?

 

[JohnAW]

In this case the equipment (manufacturing equipment) remains in China and Taiwan, so they are not imports. They are assets however.

 

[Scalloway]

If they have not entered the EU then they are not part of the UK VAT system.