HMRC have recently published Brief 16 (2016), entitled Treatment of VAT incurred on assets that are used by the business prior to VAT registration. Broadly, the brief aims to clarify 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 may recover tax incurred on goods and services before their effective date of registration (EDR). This allows the recovery of VAT against goods and services 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. This time limit is a simplification of the rules and means that detailed calculations of the use before and after EDR are not required. This excludes services that have been supplied onwards. VAT on services received within the relevant time limit can be recovered in full.
Goods have a four-year time limit for deduction that is consistent with the general VAT ‘capping’ provisions. Again, this excludes goods that have been supplied onwards or consumed before EDR. However, VAT on fixed assets purchased within four years can be recovered in full.
HMRC believe that the word ‘consumed’ has been interpreted inconsistently over time, particularly in relation to business assets and HMRC. The purpose of Brief 16 is therefore to clarify the policy position, which HMRC stress, has not changed. The policy is as follows:
Subject to the normal rules on VAT deduction:
- 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. Businesses who are partly-exempt, have non-business activities, or need to restrict VAT deduction for any other reason, will need to take that into account when calculating deductible VAT.
HMRC will accept corrections for overpayment of VAT in the following circumstances:
- the business has reduced the VAT it deducted on fixed assets, to account for pre-EDR use;
- HMRC have raised an assessment of tax to account for pre-EDR use of fixed assets;
- HMRC have reduced a repayment claim to account for pre-EDR use of fixed assets.
HMRC will consider claims for repayment of penalties and interest charged as a result of assessments.