HMRC move the goalposts in respect of Pre VAT registration input tax recovery


VAT practitioners around the country have recently become aware that HMRC has revised its interpretation of the legislation that allows the recovery of input tax incurred prior to registering for VAT. Many taxpayers who have had their pre- VAT registration input tax reviewed over the past few months have seen HMRC challenging the full recovery of this input VAT. HMRC have adopted this approach without there being a change in the law. There has also been no change made to the HMRC public notices that deal with input tax recovery.

The following is an extract from a letter sent by HMRC to a taxpayer that queried the new approach.

“I would however draw to your attention that where the Vat claimed as input tax is incurred on purchases that took place before the business became registered for VAT, the entitlement to recover this Vat is set out in the Statutory Instrument 2518, Regulation 111. For a considerable period HMRC has taken the view that this regulation allowed newly registered business to recover the Vat paid on pre-registration costs in full providing the four entitlement conditions were met.

HMRC has now recognised that the long standing interpretation of that piece of legislation is not correct. Regulation 111 is now seen as discretionary legislation to be applied by the Commissioners as they see fit. It is also subject to primary legislation which directs that for Vat to be treated as input tax it must directly relate to the making of taxable supplies. Our incorrect interpretation of that part of the Act has allowed registered businesses to claim what they were entitled to but has also allowed over payment of tax relief.

The revised interpretation of Regulation 111 is that assets purchased prior to registration shall be given a market value or a written down value as at the date of registration to reflect the fact that they have been used or “partly consumed” in making supplies that were not subject to Vat. Will you please revisit the listing of these goods and apply the relevant reduction?

VAT is a self-assessing tax and there is a considerable obligation on registered persons to ensure they have met their obligations and made accurate tax declarations. I am obliged to draw your attention to the Finance Act 2007, Schedule 24 which directs that any error in a document submitted to HMRC that leads to an actual or potential loss of revenue may be subject to a penalty.”

It is both interesting and disappointing to note that HMRC are mentioning the possibility of a penalty being imposed where a taxpayer has adhered to HMRC guidance provided in public notices.

It is likely that sooner or later, a taxpayer will seek to test HMRC’s revised policy in the Courts. In the meantime, any business completing its first VAT return needs to be aware of HMRC’s new approach.

If you are a business that may be affected by this change in approach on the part of HMRC, and would like to discuss your position with a VAT specialist, please do not hesitate to contact Gill Yates, our Head of VAT Services on 0845 177 5500 or at or by using our on-line contact form.

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