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This publication is available at https://www.gov.uk/government/publications/revenue-and-customs-brief-16-2016-treatment-of-vat-incurred-on-assets-that-are-used-by-the-business-prior-to-vat-registration/revenue-and-customs-brief-16-2016-treatment-of-vat-incurred-on-assets-that-are-used-by-the-business-prior-to-vat-registration
Purpose of this brief
This brief sets out HM Revenue and Customs (HMRC) policy on deduction of VAT relating to assets used by the business prior to its VAT registration. It clarifies when, and to what extent, VAT is deductible and what to do if the correct treatment has not been applied.
This revenue and customs brief is aimed at all businesses and professional tax advisors.
UK law allows a business registering for VAT to recover tax they have 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’re used by the taxable person to make taxable supplies once registered.
Services must have been received less than 6 months before the EDR for VAT to be deductible. This time limit simplifies the rules and means you don’t need detailed calculations of the use before and after your EDR. This excludes services that have been supplied onwards. VAT on services received within the relevant time limit can be recovered in full.
We also have a simplified rule for goods. Goods have a 4 year time limit for deduction that is consistent with the general ‘capping’ provisions. This excludes goods that have been supplied onwards or consumed before EDR. However, VAT on fixed assets purchased within 4 years can be recovered in full.
The word ‘consumed’ has been interpreted inconsistently over time, particularly in relation to business assets. This brief clarifies the policy position.
HMRC policy hasn’t changed and is as set out below. This brief has been issued because VAT on assets held prior to EDR hasn’t always been treated consistently.
Subject to the normal rules on VAT deduction:
- VAT on services received within 6 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 4 years of EDR is recoverable in full, providing the assets are still in use by the business at EDR
Full recovery only applies if your business is fully-taxable. If you’re partly-exempt, have non-business activities, or need to restrict VAT deduction for any other reason, you’ll need to take that into account when calculating your deductible VAT.
There are different rules for capital items under the Capital Goods Scheme. Please see VAT Notice 706/2 for details.
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 has raised an assessment of tax to account for pre-EDR use of fixed assets
- HMRC has 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.
Time limits for error correction in relevant cases:
- 4 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
- 4 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) as per the guidance in section 4.4 of VAT Notice 700/45.
Guidance in the VAT Input Tax manual and Section 10 and 11 of VAT Notice 700: the VAT guide will be amended to ensure the policy position is clear.