UK and International Tax news

Treatment Of VAT On Assets Acquired Before VAT Registration

Sunday 20th November 2016

HMRC has recently issued Business Brief 16/2016 which covers its policy on deduction of VAT relating to assets used by the business prior to its VAT registration and provides clarification as to when, and to what extent, VAT is deductible and what to do if the correct treatment has not been applied.

Existing VAT rules allow a business registering for VAT to recover tax incurred on goods, and services, before their effective date of registration [EDR]. This allows the recovery of VAT against goods and services provided they are used by the taxable person to make taxable supplies once registered.

HMRC states that whilst its policy has not changed, it is aware that VAT on assets held prior to EDR has not always been treated consistently.

Subject to the normal rules on VAT deduction:

  • VAT on services received within six months of EDR and used in the business at EDR is recoverable in full.
  • VAT on stock is deductible to the extent that the goods are still on hand at EDR, and
  • VAT on fixed assets purchased within four years of EDR is recoverable in full, providing the assets are still in use by the business at EDR.

Full recovery only applies if the business is fully taxable. If the business is partly exempt, have non-business activities, or need to restrict VAT deduction for any other reason, adjustments will be needed when calculating the amount of deductible VAT.

There are different rules for capital items under the Capital Goods Scheme.

HMRC will accept corrections for overpayment of VAT in the following circumstances:

  • the business has reduced the VAT it deducted on fixed assets, to account for pre-EDR use.
  • HMRC has raised an assessment of tax to account for pre-EDR use of fixed assets.
  • HMRC has reduced a repayment claim to account for pre-EDR use of fixed assets.

HMRC will consider claims for repayment of penalties and interest charged as a result of assessments.

Time limits for error correction in relevant cases:

  • Four years from the due date of the relevant VAT return where VAT deduction has been restricted in error by the business, or HMRC has incorrectly reduced a repayment.
  • Four years from the date the assessment was paid where HMRC have raised an assessment that incorrectly restricts VAT deduction.

Corrections of errors, other than assessments, should be dealt with as per the guidance in section 6 of VAT Notice 700/45 whilst claims relating to VAT paid on assessments raised in error should be made on an Error Correction Notice (form VAT652) as per the guidance in section 4.4 of VAT Notice 700/45.

If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.

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