In recent years HMRC has been restricting claims for VAT incurred before registration in regard to assets bought and used in the business before registration. Contrary to their previous policy, they were insisting that the VAT incurred on assets purchased in the four years before the date of registration for VAT needed to be reduced to reflect the use of the asset in the period from the date it was purchased until the date of registration.
HMRC have now reconsidered their position and published Revenue & Customs Brief 16 (2016): treatment of VAT incurred on assets that are used by the business prior to VAT registration. In the Brief HMRC confirm that the position is as it was always understood. The VAT incurred on an asset that was purchased in the four years before the date of registration can be claimed in full as long as the asset is still owned and used in the business at the date of registration and is wholly used for making taxable supplies. The VAT claim should be reduced if there is non-business use or use in making exempt supplies.
Many newly-registered businesses will have made reduced claims or had claims reduced by HMRC, on the basis of HMRC’s incorrect policy. These businesses are now able to submit claims to recover the previously unclaimed or disallowed VAT on these assets, as long as they meet the relevant conditions.
There is no change to the conditions for claiming VAT on services incurred in the six months before the date of registration.