A 2015 VAT case considered the rules regarding recovering VAT incurred before the effective date of registration. What can clients do to maximise the amount of pre-registration VAT they are entitled to claim, and are there any traps to consider?


Redway (R) (trading as “Loktonic”) buys and sells security locks. On his first VAT return he included a claim to recover VAT incurred on security locks he had bought prior to his effective date of VAT registration (EDR). HMRC allowed the claim in part, but disallowed it to the extent that it related to security locks that he had already sold before his EDR. R appealed against HMRC’s decision to restrict his claim in this way (see Follow up ).

The legislation at SI 1995/2518 Reg 111 (see Follow up ) allows VAT to be recovered on goods bought before the EDR, subject to certain conditions being met, one of which is that the goods are still owned by the business at the EDR. R’s argument was that this condition is not a correct application of the EU Principal VAT Directive (PVD), which UK VAT law is required to comply with. The tribunal disagreed and dismissed the appeal.


The UK legislation at SI 1995/2518 Reg 111 refers to exceptional claims for VAT relief. This includes details of when VAT incurred on goods and services before the EDR can be treated as input tax and included on the first VAT return.

The rule for services is that the costs must have been incurred no more than six months before the EDR. Recovery is affected by any partial exemption and non-business restrictions that would have applied had the business been registered for VAT at the time the costs were incurred. It is not, however, possible to use the partial exemption de minimis limits referred to in a previous article ( yr.1, iss.5, pg.8 , see Follow up ) to recover VAT incurred before the EDR.


The restrictions referred to above also apply to goods. The general rule for goods is that the costs must have been incurred no more than four years before the EDR.

Providing goods have been bought within the time limits referred to above, and subject to any partial exemption or non-business restrictions that may be relevant, VAT on goods that have not been sold or consumed before the EDR can be recovered.


The exception to the general four-year rule is capital goods scheme (CGS) assets. Details of what constitutes CGS assets and the relevant ten and five year adjustment periods are explained in a previous article ( yr.2, iss.5, pg.10 , see Follow up ).

If a CGS asset is bought prior to registration, a year is deducted from the relevant adjustment period for each complete twelve-month period that has elapsed between the date of first use and the EDR. The CGS rules then determine how much of the VAT incurred on the asset can be recovered over the remainder of the relevant adjustment period.


The word “consumed” is used in UK legislation at SI 1995/2518 Reg 111 :

“No VAT may be treated as if it were input tax under paragraph … in respect of … (ii)save as the Commissioners may otherwise allow, goods which had been consumed.”

This is not in itself controversial. The controversy relates to the way HMRC appears to interpret and apply the word in VAT Manual VIT32000 (see Follow up ). This provides a number of examples, one of which relates to a business that acquires a van three years before its EDR. The business still owns the van at the EDR, having previously used it to make supplies that would have been subject to VAT had the business been registered at the time. The guidance suggests that the amount of VAT that should be recovered in relation to the purchase of the van should be restricted to reflect use of the van to makes supplies that were not subject to VAT before the EDR. This may appear to produce a fair result, but whether it is a correct application of the current wording of SI 1995/2518 Reg 111 is another matter.


The EU PVD appears to support HMRC’s interpretation, but the way in which the PVD has been implemented into UK legislation, on which UK taxpayers are entitled to rely, is not straightforward.

The UK’s implementation of the PVD was considered by the tribunal in the Redway case. However it concerned stock that had already been sold by the business before its EDR, rather than fixed assets that are used in a business before and after its EDR. Unless a business carries a lot of old stock, the main category of goods bought years before the EDR and held at the EDR is likely to be fixed assets.

Pro advice 1. The distinction between goods and services is not always obvious, particularly in the context of refurbishment and the fitting out of premises. Advising clients on the distinction between goods and services and the different time limits that apply to each can help them to choose the most appropriate EDR for their business.

Pro advice 2. Helping a client choose the most appropriate EDR is particularly important when they have already incurred a significant amount of VAT. In some cases choosing to backdate the EDR may produce the best result for the client, allowing them to recover VAT that would otherwise be irrecoverable.


HMRC is familiar with the concept of backdating a VAT registration in order to maximise VAT recovery. An extract from paragraph 5.2 of the 25/02/14 edition of VAT Notice 700/1 (see Follow up ) says: “We may allow you to backdate your registration voluntarily by up to four years when you apply to register. This will allow you to claim back VAT as per the time limits above.”

The reference to the time limits here is consistent with the legislation at SI 1995/2518 Reg 111 . It does not suggest any restriction on VAT recovery to reflect any use of assets to make supplies that were not subject to VAT before the EDR. A business that is registering for VAT could apply for the EDR to be backdated by four years to allow VAT to be recovered on goods purchased up to eight years before the application to register is submitted.

Example. On 1 October 2015 a business submits an application to register for VAT, requesting a backdated EDR of 1 October 2011. Providing HMRC agrees to an EDR of 1 October 2011, it should be possible to recover VAT on goods purchased for use in the business from 1 October 2007 onwards, i.e. up to four years before the EDR, providing they were still owned by the business on 1 October 2011.

Pro advice. Maximising VAT recovery is only one point to be considered when helping a client choose the most appropriate EDR. The need to account for output tax on supplies made from the EDR is another point that should be considered and is particularly relevant in situations when the client’s customers cannot recover VAT or when the terms of the contract do not allow VAT to be added to the price that has been agreed.


Paragraphs 7.5 and 7.6 of the 03/05/13 edition of VAT Notice 733 (see Follow up ) confirm that VAT on goods and services bought before the EDR can be recovered by a business using the FRS to the same extent as a business not using the FRS.

Pro advice. The timing of expenditure and the choice of EDR is particularly important for clients who intend to use the FRS.

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