Pre-Registration VAT Costs: A Comprehensive Guide

VAT (Value Added Tax) is a consumption tax that is applied to the sale of goods and services. In the UK, businesses that have a taxable turnover above £90,000 (the VAT threshold) must register for VAT with HM Revenue & Customs (HMRC) and then charge VAT on their taxable supplies. The business also becomes eligible to reclaim VAT on its eligible expenses. 

For these businesses, understanding and managing VAT is crucial. One aspect that often raises questions is the concept of pre-registration VAT costs. In this guide, we will explore what pre-registration VAT costs are, why they matter, and how businesses can effectively claim them.

Note that businesses can voluntarily register for VAT before they reach the £90,000 VAT threshold above so that they can recover VAT on goods and services purchased from other businesses.

Here at Sampson Fielding (based in Mayfair, London) with our team of Chartered Accountants and Business Advisors, we’re passionate about helping small businesses navigate confidently the ins and outs of VAT, which is why we’ve put together this guide on pre-registration VAT.

What is pre-registration VAT?

Pre-registration VAT refers to the VAT incurred on goods and services purchased by a business before it becomes officially VAT registered.

Why does pre-registration VAT matter?

Claiming pre-registration VAT is significant for businesses as it allows them to recover the VAT paid on eligible expenses. This can have a positive impact on a company's cash flow and overall financial health. By efficiently managing pre-registration VAT costs, businesses can reduce the financial burden associated with becoming VAT registered.

How  to Claim Pre-Registration VAT Costs

Here are the key steps when it come to claiming pre-registration VAT:

1. Understand Eligible Expenses

Before attempting to claim pre-registration VAT, it's crucial to identify the types of expenses that qualify. Generally, goods and services acquired for the purpose of the business and used for taxable supplies are eligible. However, there may be specific rules and restrictions depending on the type of expenses.

2. Maintain Accurate Records

Record-keeping is a fundamental aspect of VAT compliance. Businesses should maintain detailed records of all purchases made before VAT registration, including invoices and receipts. Accurate documentation is essential when making a claim.

3. Include Pre-Registration VAT in First VAT Return

In the first VAT return filed after registration, businesses can include the pre-registration VAT costs. This involves calculating the total eligible VAT paid on expenses incurred before registration and reporting it in the appropriate section of the VAT return.

4. Comply with Time Limits

Businesses can generally reclaim VAT on goods purchased up to 4 years before VAT registration and services bought up to 6 months before registration so long as the goods and services are attributable to making taxable supplies.  The following conditions apply: 

What are the requirements for VAT on goods?

For VAT on goods, all the below requirements need to be met:

• The goods were supplied to the business which is now registered for VAT

• The goods were obtained for the business which is now covered by the VAT registration and related to its taxable activities

• The business still holds the goods, or they have been used to make other goods which the business still holds

• The business must compile a stock account of the goods showing the quantities of goods the dates obtained and what the good have been used for

What are the requirements for VAT on services?

For VAT on services, all the below requirements need to be met:

• The services were supplied to the business which is now registered for VAT

• The services were received for the purposes of the business which is now covered by the VAT registration and related to its taxable activities

• The services were not related to goods which were disposed of before VAT registration

• The business must compile an account of these services, this must describe the services, the dates the services were received and what they relate to

Rules on reclaiming VAT on supplies before incorporation

If the business is a company, charity or incorporation, VAT cannot be claimed on goods or services obtained before incorporation.

However, you can reclaim the VAT where:

• The goods or services were obtained by a person who became a member, officer or employee of the business

• The person was reimbursed for the full cost

• The person was not a taxable person in their own right at the time of supply or incorporation

• The conditions for goods and services in 4 above are all met

Anything else I need to know about pre-registration VAT?

Effectively managing pre-registration VAT costs is essential for businesses looking to optimise their financial performance. By understanding the process and following the necessary steps, businesses can successfully claim back VAT paid on eligible expenses incurred before official VAT registration. This proactive approach not only enhances cash flow but also ensures compliance with tax regulations, contributing to the overall success of the business in the long run. Contact us to find out more about VAT →

Further reading on pre-registration VAT and its impact on your business

From HMRC: How to treat input tax

From HMRC: Reclaim VAT on business expenses

From HMRC: Could we claim input VAT on expenses occurred before the VAT registration?