Group relief, Pre-registration VAT, Contacting HMRC

Tax law can be complicated - especially when claiming relief for corporate losses or pre-registration VAT. Last week we shared two examples of why you can't afford to let your knowledge fall behind in those areas. We also had a little moan about getting through to HMRC by phone and offered some constructive suggestions. 

Pre-registration VAT

The rules for reclaiming pre-registration VAT are fairly straight forward, or we thought they were until a change in HMRC practice came to light this week. Are you advising your clients correctly?

 

On registering for VAT the trader can reclaim VAT on goods acquired within four years before the date of registration, and on services provided with the previous six months. As long as the purchases were used for the business, and the goods were still held at the date of registration, all the VAT can be reclaimed.

 

This the impression you would get by reading paragraph 11 of VAT Notice 700, which is titled “VAT paid on goods and services obtained before VAT registration”. However, HMRC apparently changed their practice on this point from 1 January 2011, and the new approach is hidden deep within the VAT Input Tax manual at para VIT32000.

 

HMRC's new interpretation of the VAT regulations (SI 1995/2518) reg 111, says the use of the asset in the period before the VAT registration date should be taken into account. If the asset has been used in relation to supplies that have not had VAT applied, a portion of the input VAT should be disallowed to reflect that use.   

  

Example

Ken in the business of transporting racing pigeons to the point where they are released for a race. On 1 April 2012 he purchased a lorry for £90,000, including VAT of 15,000, which he expects to use for 10 years.

 

Ken registered for VAT with effect from 1 April 2015, exactly three years into the lorry's life. Under the new interpretation of VAT reg 111 Ken can only reclaim 7/10ths of the VAT incurred on the lorry: £10,500 rather than £15,000.

 

The new HMRC interpretation may be correct, but it is certainly not clear from the public VAT notices. If your clients have reclaimed VAT on the pre-2011 understanding of the rules, they should not adjust those claims. However, if challenged by HMRC they should be able to claim they had a legitimate expectation to rely on the guidance in the public VAT notices. Talk to our VAT experts if your client is affected by this. 

This is an extract from our tax tips newsletter dated 11 June 2015. The newsletter itself contained links to related source material for this story and the other two topical, timely and commercial tax tips. It's clearly written and extremely good value for accountants in general practice. Try it for free by registering here>>>