When we register your businesses for VAT they can reclaim the VAT charge on goods you acquired within the previous four years, and on services provided to the business within the last six months. As long as the items were used for the business, and you still held the goods (as stock or business assets) at the date of the VAT registration, they can claim back the VAT on your first VAT return.
However, the VAT man has recently changed his view on exactly how much VAT you can reclaim in this situation. He now says that any use of assets in the business in the period before you registered for VAT should be discounted. This is best explained by an example.
Chad has a livestock transport business. On 1 April 2012 he purchased a lorry for £90,000, including VAT of £15,000, which he expects to use for 10 years. He registered his business for VAT with effect from 1 April 2015, exactly three years into the lorry’s life.
The VAT helpline advised Chad to reclaim 7/10ths of the VAT incurred on the lorry: £10,500 (7/10 x £15,000), as the first three years of the lorry’s life were used for sales for which VAT was not charged.
Since VAT was introduced to the UK in 1973 the rule has always been that ALL the VAT on assets in use at the VAT registration date could be reclaimed. In the example above Chad would have reclaimed £15,000 in respect of his lorry.
The new interpretation of the VAT law has not been included in the VAT notices and leaflets published by HMRC. So if you have previously reclaimed all the VAT on goods (up to four years old) held at the date your business became VAT registered, you don’t have to alter your previous VAT claims.