Pre-registration VAT

[K2 Accountancy]

Afternoon,

Newly VAT registered minibus and taxi hire business that has operated for a number of years before reaching the VAT threshold. A submission has been sent to HMRC in respect of the VAT on pre-registration goods going back four years and services going back 6 months that were still in use at the registration date. This is quite size-able as a number of taxi vehicles were purchased in this period.

A reply has been received from HMRC indicating that after a change in interpretation going back to Spring 2014, the full amount is no longer recoverable and only the VAT on the market value or depreciated cost of the vehicles at the registration date is now able to be reclaimed. In addition, the client had also paid for a new engine for a vehicle, which was capitalised at the time as it extended the useful life of the asset. The HMRC officer has again indicated that the VAT on this is not recoverable as the engine is treated as consumed prior to the date of registration.

Does anyone have experience on such matters, either the taxis themselves or the engine query because as mentioned above the original interpretation was that as long as the asset is still in use at the registration date then the VAT is recoverable, this now appears wrong

 

[UK Contractor Accountant]

HMRC’s change of approach is hidden in VAT Manual VIT32000 although this itself seems to contradict itself. At one point it states that: “The amount of tax that can be recovered is the amount that would have been deductible had the business been registered at the time the tax was incurred”. It then goes on to say that “You must also take into account any use that has been made of the goods prior to registration”.

The need to take account of use prior to registration is not mentioned in either of HMRC’s VAT notices on the matter, which is where most advisors and clients would look for the information. Therefore, if HMRC tries to challenge full recovery of the VAT, it would be a legitimate defence to say that the client had relied on the guidance in the public VAT notices.

 

[UK Contractor Accountant]

HMRC's VAT Notices where the apportionment guidance is overlooked- VAT Notice 700/1: should I be registered for VAT? which deals with registration issues – specifically in paragraph 5.2 which deals with pre-registration input tax claims & Notice 700: The VAT Guide at section 11 also ignores the method of calculation.

 

[Bob]

Maybe @lesvatadvice has some comments on this?

 

[K2 Accountancy]

Thanks UKCA, your exactly right in that it was the VAT notices and the VAT guide from which the decision to include the whole amount has been determined but it is regulation 111 that the HMRC officer is now referring.

Problem is that we have now been asked to revisit the return to ensure that the provisions of regulation 111 are included and adjust the numbers and return as appropriate. Also goes on to say that as Vat is a self-assessing tax there is no prescriptive formula that can be applied.....great.

 

[john1989]

My interpretation of Reg 111 is that it allows for full recovery.

 

[lesvatadvice]

Reg 111 provides for full recovery. HMRC guidance (VIT32000) referred to above takes a particular view of the European legislation, which HMRC seem now to prefer. This issue has not been addressed at the Tax Tribunal yet.
I would stand my ground on full recovery, and see what HMRC do.

 

[K2 Accountancy]

Thanks John and Les. Would you say that this is the same for the engine and other goods that are still in use at the registration date as well as the taxi purchase themselves.

In my mind, if HMRC implemented the view that has been suggested then surely any services, which pretty much always go through the P&L would also be treated as consumed, therefore leaving the 6 months service rule redundant....a pretty big change in policy

 

[lesvatadvice]

The purchase of an engine is a supply of goods; the installation of the engine is a supply of services, so there is an issue of timing for this.