For the last 43 years newly VAT registered businesses have been able to reclaim in full, VAT incurred on goods acquired in the 4 years (3 years before 1 April 2009) prior to registration, provided those goods related to the business activity and were still held by the business at the time of registration. A similar rule exists in relation to services incurred prior to registration, that a trader can only go back a maximum of 6 months in respect of these.
Now HMRC has changed its interpretation of this VAT guidance by applying a time apportionment rule, this now means many newly registered businesses will be unable to reclaim in full VAT on these pre-registration goods and services, thereby leaving them out of pocket.
For example, someone who becomes VAT registered and has owned a van for a year prior to their registration date and expects to use the van for the next three years, would now be unable to recover the full amount of VAT incurred on the purchase of the van.
Under the new HMRC guidance they would have to apportion the input VAT and restrict their claim to 75 per cent of the VAT incurred. The 75 per cent represents the expected post registration business use (3 years) as a fraction of the total period of business ownership (4 years).
Brent Goodwin, Senior VAT Manager at Newby Castleman, said: “With no formal announcement, these changes by HMRC have come out of the blue and have shocked many firms. Subsequently, it’s highly likely they will have an effect on a business’s cash flow and will result in confusion with traders, advisors and VAT officers alike.”
Brent continued: “We are strongly advising people to keep hold of original documentation in relation to goods and services affected by these changes until at least this matter has been tested in the Courts, as such documents will be needed to support any later claim for wrongly restricted input VAT”.