Reclaiming VAT on Purchases Before VAT Registration

Two windows, one end date: your effective date of registration

Most adviser pages open with the same two limits, and they are right. On goods you still hold when you register, you can reclaim the VATValue Added Tax: A consumption tax added to most goods and services - standard rate 20% in the UK. Businesses above the £90,000 turnover threshold must register, charge it, and pass it to HMRC. if you bought them in the 4 years before registration. On services, the limit is 6 months.

The part most of them skip is where the count starts. Regulation 111 of the VAT Regulations 1995 measures both limits back from the date with effect from which you were, or were required to be, registered. That is your effective date of registration, not the day you applied and not the day HMRC sent your VAT number.

If you registered late, that is the date you should have been registered from. So your window sits earlier than you expect, and you also owe VAT on your sales from that date.

When you must register, and from what date, is set by the rolling 12-month test against the £90,000 VAT registration threshold. That is covered in our VAT registration trap guide. This guide covers what you can reclaim once you are registered.

Work through your own list, one line at a time

The answer depends on each purchase: its date, whether it is goods or services, whether you still hold it, and whether you have a valid VAT invoice. Each purchase must also be for your business and for making taxable supplies. Here is one trader's list.

Priya is a sole trader whose effective date of registration is the first day of a month. Every price below includes VAT at the 20% VAT standard rate, so the VAT in each is one-sixth of the total. Each supplier was VAT-registered and gave her a VAT invoice.

Priya claims £600 on the first VAT return she is required to make, and keeps the stock account and the services list as evidence. The £300 on the website and the £200 on the stock she sold before registration are lost.

To take the VAT out of your own invoice totals, use the one-sixth shortcut in our VAT calculator.

Stock you sold and equipment you still use are treated differently

VAT Notice 700 paragraph 11.2 says you do not need to reduce the VAT you deduct on fixed assets, such as a van or machinery, provided the asset is still in use in the business when you register. Stock for resale is different: you must cut the claim for any stock sold before you registered.

The reason is what each item has already done. A fixed asset is still at work in a business that now charges VAT, while stock you sold has already made a sale that carried no VAT.

Goods you completely used up before registration do not qualify at all, however recently you bought them. Nor do services that relate to goods you disposed of before you registered, such as a repair to a machine you then sold.

Keep the records the claim rests on: a VAT invoice for each purchase, a stock account (the quantities you bought and the dates, and what you sold or used before registration) and a list of services with a description and date for each (Notice 700 paragraphs 11.2 and 11.3). One special case for an adviser: items in the Capital Goods Scheme fall outside regulation 111.

The claim goes on the first return you are required to make

Regulation 111(3) says the claim must be made on the first return you are required to make. HMRC's VAT Input Tax manual at VIT32000 spells out the trap: it is the first return you are required to make, "not the first return which they do make".

A claim on a later return needs HMRC to allow it, and regulation 111(3B) stops HMRC allowing one more than 4 years after the due date of that first return. If you have missed it, ask HMRC how to make the claim before you put it on a later return.

Backdating moves both windows - and costs output VAT

If you register voluntarily, HMRC may allow you to backdate your registration by up to 4 years (VAT Notice 700/1 section 5.2). That pulls both windows earlier.

You make this choice when you apply. Section 5.2 also says that once HMRC agrees a registration date with you, it will not normally allow you to change it.

The cost is in section 3.9: you must account for VAT on all your standard-rated and reduced-rated sales from the earlier date.

If you did not add VAT to those sales at the time, the price you were paid is treated as already including it, under VAT Act 1994 s19(2). So the VAT comes out of your takings.

When she applies, should Priya ask to backdate her registration by 4 months to bring the website into the window? The backdate makes the website 5 months old at the new effective date, so its £300 becomes claimable. Assume she sold the 40% of her stock more than 4 months before her first effective date, so the backdate does not change the stock line. Stock sold inside the extra 4 months would be held at the new date, so its VAT would also become claimable.

But she must account for VAT on every standard-rated sale in those 4 months. She made £12,000 of sales to the public with no VAT added, so the price already holds the VAT and the VAT due is one-sixth: £2,000. Net result of the backdate: £300 gained, £2,000 paid, a loss of £1,700.

The trade can pay only when the extra input VAT is larger than the output VAT, for example a trader who paid for costly services more than 6 months before the first effective date and made few sales in the extra months. Goods still held that were bought in the 4 years before the first effective date are claimable without a backdate, so equipment bought in the extra months gains nothing from it.

Choose the date with these numbers in front of you. Notice 700/1 section 3.9 says a request to amend the date you register "does not carry a right of appeal or review".

Spending before your company existed

A company can reclaim VAT on goods and services bought before it was incorporated. The person who paid must have become a member, officer or employee of the company, been reimbursed in full by it (or have its promise to reimburse in full), and not been a taxable person for VAT at the time (regulation 111(1)(b) and Notice 700 paragraph 11.4). Each purchase must also pass the goods and services tests above, as if it had been supplied to the company itself. And it must have been bought for the company's business and used for nothing else.

Still choosing how to trade? Our guide to sole trader versus limited company sets out the tax on each side. The Income Tax side of these same purchases is a different tax with its own rules, covered in our allowable expenses guide.