HMRC has published a brief setting out the policy on the deduction of VAT relating to assets used by a business prior to its VAT registration, saying this has not always been treated consistently.
The brief clarifies when, and to what extent, VAT is deductible and what to do if the correct treatment has not been applied.
A business registering for VAT can recover tax they have incurred on goods and services before their effective date of registration (EDR) as long as they are used by the taxable person to make taxable supplies once registered.
Services must have been received less than six months before the EDR for VAT to be deductible, while goods have a four year time limit for deduction that is consistent with the general ‘capping’ provisions.
HMRC says the word ‘consumed’ has been interpreted inconsistently over time, particularly in relation to business assets. It states that VAT on services received within six months of EDR and used in the business at EDR is recoverable in full. VAT on stock is deductible to the extent that the goods are still on hand at EDR (for example apportionment may be required).
VAT on fixed assets purchased within four years of EDR is recoverable in full, providing the assets are still in use by the business at EDR.
Full recovery only applies if the business is fully-taxable. If it is partly-exempt, has non-business activities, or need to restrict VAT deduction for any other reason, the business will need to take that into account when calculating the deductible VAT.
HMRC says it will accept corrections for overpayment of VAT in the following circumstances. These are if the business has reduced the VAT it deducted on fixed assets, to account for pre-EDR use; circumstances where HMRC has raised an assessment of tax to account for pre-EDR use of fixed assets; and cases where HMRC has reduced a repayment claim to account for pre-EDR use of fixed assets.
HMRC says it will consider claims for repayment of penalties and interest charged as a result of assessments.
The time limits for error corrections are four years from the due date of the relevant VAT return where VAT deduction has been restricted in error by the business, or HMRC has incorrectly reduced a repayment, and four years from the date the assessment was paid where HMRC have raised an assessment that incorrectly restricts VAT deduction.
Corrections of errors, other than assessments, should be dealt with as per the guidance in section 6 of VAT notice 700/45. Claims relating to VAT paid on assessments raised in error should be made on an error correction notice (form VAT652).
HMRC is to amend guidance in the VAT input tax manual and Section 10 of VAT notice 700 to ensure the policy position is clear