12 August 2015 | Taxation
It’s common for new businesses to incur hefty vat liabilities on start-up costs. While you can claim a tax deduction from profits for these, tricky rules mean you might not be entitled to reclaim all the VAT. What steps can you take to maximise the tax recovery?
Special rules exist to allow new and existing businesses to reclaim VAT on pre-registration purchases. To qualify purchases must be:
made by the same person(s) that is registered. This means a company can’t reclaim VAT incurred by a sole trader who has transferred their business to it for goods bought within the previous four years and not consumed before registration for services bought in the previous six months unless they have been wholly consumed before registration.
Goods are consumed if they aren’t on hand at the time of registration. For example, fuel bought for a company van ceases to exist once used and so the VAT on pre-registration purchases can’t be reclaimed. By contrast, VAT paid on raw materials bought and unused, or used to make, say, an item of stock which is on hand at the date of registration, can be recovered.
The rules for pre-registration services aren’t that different for those for goods, but can be more generous. For example, VAT paid on rent in the six months before registration can usually be reclaimed, even though you might think that once a rental period ends the service must have been consumed. However, tribunals have ruled that rent, and likewise telephone and other overhead costs, is likely to be linked in some part to post-registration supplies and so any VAT paid on this can be reclaimed.
Trap: VAT on start-up costs is often consumed before registration meaning the right to reclaim it is lost.
Example. In June 2015 Sam leases a shop for his new digital print business. He pays £20,000 plus £4,000 VAT to shopfitters for a refurb. He also spends £1,000 plus VAT of £200 on paint and wallpaper. In January 2016 he starts trading and registers for VAT. The VAT on the shopfitter’s bill is older than six months and can’t be reclaimed. While the paint and paper are goods, and so a longer time limit applies, it has been consumed, i.e. the paint has been applied to the walls etc. and so the VAT on this is lost too.
The usual suggestion for businesses like Sam’s is to register for VAT voluntarily. But this won’t work. Voluntary registration is only allowed where some VATable sales are made. In other words, you have to be carrying on a business before you can register voluntarily.
Tip: to ensure a full recovery of VAT on start-up costs, you can apply for a special type of registration as an “intending trader”. As long as you can prove to HMRC that you are genuinely in the process of starting a business that will make VATable supplies, it will register you meaning you won’t lose out. Note. An intending trader registration can be backdated.
Timing advantage. Not only does an intending trader registration eliminate doubt over reclaiming VAT on start-up costs, you’ll get it back sooner than if you wait until you start your business to register and then reclaim it.
You can ask HMRC to register you for VAT before you start trading. This is known as intending trader registration. Once registered you can reclaim VAT on all business expenses which might otherwise be lost through time or other restrictions. An intending trader registration can even be backdated.