Claiming VAT from before registration

[Steve The Viking]

Hi All,

I'm starting a Viking Festival that will be running for the first time this year, and I have a question regarding VAT registration.

Valhalla Viking Festival, if you'r interested.

I have already taken in about 75% of what I expect to make from ticket sales, and I'm still below the VAT threshold, so haven't registered for VAT.

I will have to start making most of my large outgoing payments soon, primarily for the festival infrastructure, most of which will be charging me VAT.

My questions is this. I assume that things such as Marquee hire, etc. count as services, which I can claim back the VAT on if I register for VAT up to 6 month after being invoiced for them. Is that correct?

Does that mean that I can start to pay my large outgoings, which will be amounting to ~£25K including VAT, and continue to sell tickets (while not VAT registered), and then register for VAT in say 3 months, and then claim back all the VAT I will have spent (~£4.1K) without having to have collected VAT on the tickets I would have sold up to that point?

If this is the case, will I need to start charging VAT on ticket sales once I receive confirmation from HMRC that I am VAT registered? Can I then make a claim straight away for the VAT that I have paid, or will I have to wait until a VAT period is up?

Roughly how long will it take to get the VAT that I paid back?

I am running this as a not for profit event, so cash & cashflow are pretty tight, and I want to make everything stretch as far as possible. All going well, we will run this event annually, and will go over the VAT threshold by year 2 of the festival, so I'm just trying to choose the best time at which to register for VAT.

I look forward to your responses, and thank you for your help.

Cheers,
Steve

 

[Scalloway]

When you register for VAT you send in a return quarterly. So if you register today you probably will make your first return for the period up to 31 May (it may be a month earlier, it's a long time since I did this). This return must be sent in by 7 July. If you are due to pay VAT you must pay it at the same time. A first repayment claim my take a few weeks as HMRC will want to see some of the larger invoices you are claiming for.

If you are claiming for pre registration VAT on services my understanding is that you cannot reclaim VAT on services that have been consumed prior to registration. So if you hold your festival in July and register in August you can't reclaim VAT on the marquees you hired in July.

 

[spidersong]

I'll try to have a look later as I can't remember the case off the top of my head, but..
There was a case regarding pre-registration expenses and festival tickets where the people running it did exactly as you're suggesting; ticket sales prior to registration and expenses after or within the pre-reg expenses recovery period. Essentially they tried to have their cake and eat it; no VAT on most sales but recover most of VAT on expenses. So something like 70% of sales in July, Register in August, expenses in July, August and September, then festival in Mid September.

HMRC challenged the claim and won on the argument that the expenses related to all ticket sales and so although the festival hadn't taken place the expenses had been used in making the supplies that took place prior to registration and so recovery should be restricted.

So I'll try to confirm that my memory is correct later and find the name of the case but I don't think you'll be able to unsqueeze margins using VAT registration.

 

[spidersong]

Found it:
Perth Junior Chamber Conferences 1994 Ltd [Case EDN/94/323]

They organised a three day conference taking place 29 April to 1 May, took most of their fees prior to 31 March and registered on 14 April. Then tried to recover all the VAT they'd been charged, HMRC argued that the Input Tax wasn't attributable to taxable supplies made by a taxable person as the supplies were made prior to registration e.g. prior to being a taxable person, and so recovery wasn't allowed.

Also the later case of Schemepanel Trading Ltd does much the same thing but adding the fact that as a high court judgement it created full legal precedent:
There a builder took payments on account for work prior to registration as well as some amounts after, but didn't incur a lot of its expenses until after registration and sought to recover the VAT as it was a taxable person at the time it received the supplies. HMRC refused much of the Input tax claimed, and the court observed that the supplies were "cost components of supplies made by the appellant which were not chargeable to tax". They were "effectively outside the VAT system" and so did not "confer a right to deduct input tax."

[EDIT]
The HMRC manual dealing with the implications of the case is here: https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit61080
and has a little more to say here:
https://www.gov.uk/hmrc-internal-manuals/vat-input-tax/vit10600

 

[Steve The Viking]

Thanks for that.

So even if I VAT register now, I might not be able to recaim VAT for any purchases made going forward?

I seem to have completely misunderstood the rules regarding this. I thought it was the case that if the services piad for in the last 6 months haven't been consumed, then I could claim back
VAT for them, and anything that I pay for after VAT registration was definitley OK, regardless of what Income I made prior to VAT registration.

Can you point me at the government details that describe the rules?

I am planning on registering for VAT at some point in the next 12 months regardless, but I'm just trying to choose the optimal time. It would be terrible if I registered, had to give 16% of my future ticket sales away, and couldn't claim back the VAT on my expenses.

 

[Steve The Viking]

Is it based on whether more than 50% of the money has already come in? e.g. if I'd sold 40% of my tickets and then registered, then I can claim back, as I would still be expecting a lot of VATable sales, or would it be that I can claim back part of the VAT, e.g. 60%?

This get's really interesting, as I've currently sold ~75% of the minimal number of tickets that I need to sell to make everything break even, but only around 35% of maximum possible ticket sales based on my capacity.

So it may be the case that if my ticket sales don't go well from this point, I can't reclaim the VAT, but if I sell out I can?

How would that work if I VAT register now and don't know how many more tickets I'm going to sell?

Also, we will be charging for things at the event, which would count as VATable sales.

Cheers,
Steve

 

[spidersong]

Hi, the best way to think of it is that you don't get something for nothing with HMRC therefore:
Generally you'll only be able to claim VAT back, or portions of VAT back, on things that you'll use to make taxable supplies and you only make taxable supplies after registration.

It may be that you'd need to agree an attribution of costs with HMRC for anything where there's a mix of taxable and non-taxable supplies, so site hire if you've got 33% of tickets sold prior to registration (no tax) and 67% after (VAT charged) would meant that you'd recover 67% of the site hire (if you're charged VAT since lots of rights over land don't have VAT on them).

Catering charges you'd probably get everything back on as you'd only be selling food over the event period and so you'd be charging VAT on all of it and so able to recover VAT on all of it (assuming none of the presold tickets include free food).

Generator hire and marquee might need apportioning between taxable and non-taxable tickets etc. etc.

Goods you've bought/you buy you'll probably be all right on (if you still hold them) as they will be used for making future taxable supplies either through generating future ticket sales or because you're going to be selling them whilst registered, the area's where you have issues will probably mainly be on services (unless the tickets carry a right to receive goods with them).

Going back to "I thought it was the case that if the services piad for in the last 6 months haven't been consumed, then I could claim back VAT for them, and anything that I pay for after VAT registration was definitley OK". Whilst it's most of the way to being correct you still need to remember the first rule of VAT recovery is that any VAT you recover must be used in the course of making taxable supplies.

It's really the main point in the Schemepanel case, you can't take £15,000 for an extension without charging VAT, register for VAT and charge £1000 plus £200 of VAT and then ask your suppliers to invoice you for 3 tonnes of bricks, cement, and double glazing units so that you incur £2000 of VAT and claim that all back. Even though those bricks/units might not have been used prior to registration and the invoice is after registration those bricks/units won't have been fully used to make a taxable supply and so the VAT won't be fully recoverable.

For the rules there are the references in my earlier post but the main contents page for the Input Tax manual is here: https://www.gov.uk/hmrc-internal-manuals/vat-input-tax
and the (perhaps) more user friendly text in the HMRC notice is here: https://www.gov.uk/guidance/vat-guide-notice-700#section10 Section 10.2 and 11.2 are possibly the most relevant bit for the current discussion. 10.2 says that you can normally reclaim input tax that relates to "supplies you make which are liable at the standard rate, reduced rate or the zero rate" and the problem you have is that some of the VAT you're incurring relates to supplies (ticket sales) you've already made which aren't liable to any VAT rate.

 

[Steve The Viking]

Thanks,

That's really helpful. I'll have a look and try to make some sense of the references you've provided.

Cheers,

 

[A K]

Wait what? You cant recover input vat on services from the 6 months prior to the 1st day you start charging VAT?

Lets say I started charging VAT on the 1st Jan 2020. First VAT return is for the period up to 31st Jan 2020. In that return I cant put claims for VAT incurred when paying for services related to the business from the 6 months before (from 1st July 2019)?

Because all goods (inventory for sale) that I had in possession on the 1st day of starting to charge VAT, I reclaimed the VAT on it. Also any services I paid for during the prior 6 months which incurred me VAT I also added to my claim. All in my first return ended up with HMRC owing me a refund (although I told them to hold it on account so it can be offset against future returns).

Was I wrong to do this?

 

[A K]

deleted

 

[spidersong]

Without knowing what and how you trade I couldn't say for certain, but as you seem to deal in selling goods then your return is probably correct.

All the goods you had on hand at 1st Jan are/were going to be used in maing taxable supplies and so were recoverable.

If the services were mainly overheads, such as advertising, accountancy, work on a shop etc. then they also will be used in making taxable supplies in the future and will be recoverable. If it was services such as delivery charges for goods you'd sold prior to 1st Jan then they wouldn't be recoverable as they'd have already been fully consumed.

The discussion above is fairly specific to the OPs situation, e.g. where most of the costs relating to a supply are incurred after the supply has been invoiced out and was invoiced prior to registration. That doesn't sound like your situation.