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VAT Voice by Steve Allen

Steve Allen, Director of VAT Solutions (UK) Ltd, describes what VAT can be reclaimed on costs incurred in respect of a new business venture, before a company is even formed.You are starting a new business venture, and decide to run it through a new limited company. But you are starting to incur costs before the company has even been formed, let alone registered for VAT. So what happens to all the VAT you are incurring?

The sort of costs you are likely to incur before incorporation are legal and accountancy costs, and then after incorporation, but before VAT registration, purchase of machinery, capital items and stock. In all, a considerable amount of VAT can be incurred before the business starts to trade.

Customs are aware of this, and allow the recovery of the VAT subject to certain rules.

A corporate body can recover VAT incurred before incorporation on its first VAT return, provided the person to whom the supply was made, or who paid for the supply,

- became a member (shareholder), officer, or employee of the corporate body

- was reimbursed for the whole cost of the goods or services, and

- acquired them for the purposes of the business.

VAT can also be recovered on goods purchased three years prior to registering for VAT, provided the goods are still on hand at the time of registration, and the normal evidence for the deduction of input VAT is retained (i.e. the purchase invoice). You cannot recover the VAT on the costs of goods that you no longer have at the time of VAT registration because they have been sold or used up.

With services, the rules are slightly different. The VAT on services can only be recovered on services received six months prior to VAT registration. The services have to be used for the purposes of the business,s and you have to retain the purchase invoice.

Tip

If you incurred considerable VAT costs on services received prior to applying for VAT registration, you can apply to be registered for VAT from an earlier date.

Example:

You incur accountancy and legal costs that are billed to you on 1 June 2002. The initial phase of setting up the new business is completed on 1 February 2003, so you apply for VAT registration from that date. You can’t reclaim the VAT on the services because they are more than six months old. When you apply for VAT registration, you can apply to be registered from an earlier date (up to three years earlier), so you fill in the VAT 1 showing a registration date of 1 December 2002, well within the six month limit, and get round the limit.

You are supposed to claim back any pre-registration VAT on your first VAT return. However, Customs may allow the claim to be made on a later return, up to three years after the date the first return was due. You could, therefore, reclaim the VAT on costs up to six years after they were incurred.

The same rules apply for sole proprietors and partnerships.

If you are forming a company and bringing it into a VAT group, the “representative member” may recover the VAT incurred by the new member prior to its entry into the group, subject to the normal rules. Remember that you can only join a VAT group from a current date, so you can’t backdate its registration date.

If your business is partly exempt, Customs take the view that you should directly apportion the VAT you incur prior to registration to either exempt or taxable activities, and only recover the VAT on the taxable activities.


Steve Allen
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc