Additionally, he has some equipment that he bought a couple of years ago and he is hoping that he could claim this too. Does there need to be any adjustment made for use prior to VAT registration?
A. The rules on pre-registration input tax are set out in the VAT Regulations 1995 (Reg. 111).
Where goods were bought by the business in the four years prior to the date of VAT registration and those goods are still on hand at registration, input tax may be claimed to the extent they are for use in making taxable supplies. This means that if the business uses those goods for exempt, non-business or private use, there would need to be an apportionment to reflect that. However, there is no adjustment required to reflect use prior to VAT registration. HMRC did at one point implement a policy of requiring such an apportionment and amended their internal guidance to this effect, but this was later rescinded. Assuming wholly business use in a fully taxable business the input tax would be claimable per the original VAT invoice.
However, before rushing to register there are a couple of other things to consider.
Firstly, who are your client’s customers? If he supplies mainly individuals or unregistered businesses, he may find it difficult commercially to pass on VAT on his sales in full. If he is unable or unwilling to increase his prices and he has to account for output tax out of his turnover, effectively paying 1/6 to HMRC, does the VAT recoverable on the purchases outweigh that additional cost to his business? If not it may be better to defer voluntary registration until closer to the four-year time limit for claiming pre-registration input tax, or even sacrifice it altogether. There is less scope for delaying registration while still being entitled to input tax where the VAT has been incurred on services, as the time limit for pre-registration input tax on services is only six months.
If his customers are mainly VAT registered businesses in a position to recover the VAT he charges, then registering voluntarily should not create a problem, other than the additional admin.
The other issue to check is the entity. A problem arises where the entity that bought the goods is not the same entity that is now registering for VAT. Usually, this is when a sole proprietor starts the business but doesn’t register for VAT and later incorporates, and only the company VAT registers.
Even if the purchases were made within the time limits, by a person who became an officer or employee of the business and who has been reimbursed, if they were not bought specifically for the purposes of the company it cannot recover the VAT. Where goods or services have been bought for the SP business, the only entity with any entitlement to input tax would be the SP.
In this situation it may be worth registering the SP for a few days before he incorporates the business to give him an entitlement to his input tax, and then, on incorporation, transfer the business and assets as the transfer of a going concern (see notice 700/9) to the limited company, maybe reallocating the VAT number using form VAT68. Obviously, this does rely on a degree of forward planning, so if a client has already ceased to trade as an SP and started trading only through the company the opportunity is lost.
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If you have a VAT query why not contact the VAT Advice Line on 0844 892 2470 to discuss the implications. Our team of experts have a wealth of experience and can also provide a written consultancy service at £180 per hour plus VAT.
