VQOTW: Recovery of VAT Incurred Prior to VAT Registration

My client ran his decorating business for three years as a sole trader and is now going to incorporate. As a sole trader his turnover never quite reached the registration threshold but he will VAT register when he incorporates as a lot of his customers are now contractors. Will he be able to recover VAT on his limited company registration on the van, tools, and equipment he bought as a sole trader and will still use in the company?

The entitlement to recover VAT on stock and assets on hand at registration as if it were input tax is contained in regulation 111 of the VAT regulations 1995.

In the case of a limited company, where VAT was incurred before its incorporation it can be recovered on goods obtained for it, and services obtained for its benefit subject to certain conditions being met.  The crucial point here is that the goods or services must have been obtained for the company.  Where the goods or services were bought for the purposes of another entity, in this case the sole trader, then the VAT cannot be recovered by the company.

Where goods or services were bought prior to incorporation, which were for the company rather than any pre-existing entity, the conditions for recovery are:

The goods were bought within the four years prior to the date of registration and are still on hand;

Services were bought within the six months prior to the date of registration;

Services have not been supplied on, are not to goods no longer on hand, and are not to goods which have been held for more than four years;

The VAT in question is not in respect of a capital goods scheme (CGS) item;

The goods or services were obtained or imported by someone who became an officer or employee of the company;

The person was reimbursed for the full cost (or received an undertaking for full reimbursement), and

The person was not a taxable person at the time of the supply or importation.

If your client has not yet incorporated, it may be worth considering a voluntary VAT registration for the sole trader business.  This would provide a means of VAT recovery on those assets already on hand.  Your client could continue as a sole trader for a short time and then transfer the business as a going concern into the new company with a form VAT68 to reallocate the VAT number.  The sole trader registration would only need to be for a matter of days in order to establish entitlement to VAT recovery. Output tax would, of course, be due on any standard or reduced rated supplies made by the sole trader during his period of registration, but this is likely to be outweighed by the input tax benefit.

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Senior VAT Consultant
0844 892 2470

Viv has worked in VAT since 1989, when she joined HMRC as an Assurance Officer. Before joining the team as a consultant in 2000, she had spent five years dealing with written and telephone enquiries at a local VAT office.

In 2007/ 2008, she spent a year with a major accountancy firm gaining experience of VAT from a different perspective and developing skills which are relevant to her current role.

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