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HMRC internal manual

VAT Land and Property

Option to tax: input tax and the option to tax: can pre-registration input tax be claimed?

Background: law and concessionary treatment

Until 1 January 2011, where a previously unregistered business opted to tax and registered for VAT , their legal entitlement to recover VAT paid prior to registration was limited to that incurred within the 3 (or 4) year and 6 month time limits specified in VAT Regulation 111, SI 1995/2518. That means they were entitled to treat as input tax VAT incurred up to 3 (or 4) years before registration in the case of goods on hand at registration and up to 6 months before registration in the case of services, but could not recover VAT incurred outside of these time limits under the law. As this put previously unregistered businesses at a disadvantage compared to businesses who were already registered (due to other business activities) , we operated a concession under which we would consider making repayments on an individual extra statutory basis of VAT incurred outside of the Regulation 111 time limits.

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Withdrawal of concession and changes to law

The concession has now been withdrawn and does not apply to anyone who registers on or after 1 January 2011. Also, Regulation 111 ceased to apply to VAT incurred on capital items from that date. However, the CGS has been expanded to cover capital items that were owned at the point of registration so that a fair recovery can be made over the life of the building (see Revenue & Customs Brief 53/10 (National Archive)).

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Concession still applies to some taxpayers who registered before 1 January 2011

Taxpayers who registered prior to 1 January 2011 as a result of opting to tax may still be entitled to a concessionary payment under the policy which operated before the concession was withdrawn. However, you should be aware that the concession was withdrawn in stages and was applied more restrictively from 1 May 2010. This means that taxpayers who registered between 1 May 2010 and 31 December 2010 will only be entitled to a concessionary payment where the VAT was incurred in relation to a building or refurbishment that would have been a CGS item had the taxpayer been registered at the time it was incurred. This restriction does not apply to those who registered before 1 May 2010.

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What to do if you receive a claim

If you receive a request for a concessionary payment from a taxpayer who registered prior to 1 January 2011, please refer the case to the National Option to Tax Unit (contact details in paragraph 4.2.3 of Notice 742A), who will review the case (they may ask you to carry out assurance checks) and submit to VAT Policy for processing, if they think a payment is due. Before submitting the case to VAT Policy, they or you will need to:

  • verify the claim and carry out assurance checks (by checking all invoices and carrying out any other appropriate checks), and
  • make a recommendation as to whether a concessionary payment should be allowed.

All the relevant papers, such as the option to tax notification and copies of invoices, should be forwarded with the recommendation.

We will not authorise a repayment unless satisfied that the claim relates to VAT which

  • was incurred outside of the Regulation 111 time limits
  • specifically related to supplies that would be taxable as a result of the option to tax, and
  • would have become recoverable as input tax, following the option to tax, if the taxpayer had already been registered for VAT at the time when the VAT was incurred.