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14
Nov

VAT: HMRC make a U-turn

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Good news for newly VAT registered businesses. HMRC earlier this year had outlined a prior use adjustment charge for any input VAT claim on assets/services pre VAT registration to account for 'wear and tear' of the asset. This has now seen a U-turn from HMRC meaning old rules still apply.

A newly VAT registered business can claim input tax on its first VAT return in relation to certain expenditure paid before it was registered:

  • Services – for the six-month window before registration, as long as the service has not been supplied onwards before registration.
  • Goods – the window is four years, as long as the goods were wholly used in the business in the period before VAT registration, and are still owned by the business on its first date of VAT registration. The goods can be either business assets or stock.

We would highlight the fact that a business registered on the flat rate scheme for VAT, which under normal circumstances could not claim input VAT unless the asset cost £2,000, will be included under the same rules above. Pre registration input VAT will be recoverable in line with the bullet points above for this type of business.

Example

Lee bought a van to use in his decorating business on 1 November 2014 for £20,000 plus VAT. He registered for VAT on 1 November 2016.

Under HMRC’s revised interpretation implemented from 2011 to 2016, Lee should claim input tax on the market value of the van on the date of his VAT registration. If Lee applied an annual depreciation rate of 25% straight line basis to the value of his van, he would claim input tax of £2,000 on his first VAT return, rather than £4,000 (as shown on the invoice for the van).

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