VAT On Pre-Registration Assets
When a business becomes VAT registered, it can reclaim VAT paid on stock or assets acquired in the four years before the date of registration, which is held, or in the case of assets, still in use for business purposes at that date. The business may also reclaim VAT incurred on services purchased for business purposes within six months before registration.
Most tax advisers would agree that the business can reclaim all of the VAT incurred in respect of those assets or services, subject to a restriction where the assets or services have been used to make exempt supplies. However, HMRC has been challenging this view for around 5 years. It says that the VAT reclaimed on assets (not services) should be reduced to reflect the use of that asset by the business in the period before the VAT registration.
HMRC amended its internal manual to reflect this odd interpretation of EU law, but it did not change VAT Notice 700/1 or VAT Notice 700. Now HMRC has “clarified” the position in brief. Which explains that the law applies as most always thought it had. That is: all the VAT can be reclaimed in respect of assets acquired in the four years before registration, without a reduction for use of those assets in the period before the registration date.
If you have voluntarily reclaimed only a proportion of the VAT incurred on the purchase of assets, you can now amend your claim if it is still within 4 years of the original claim.