Can I Reclaim VAT On Purchases Made Before Registering For VAT?
Value Added Tax (VAT) is a tax applied to most goods and services sold in the UK. Businesses that register for VAT must charge VAT on the goods and services they provide and are also entitled to claim back the VAT they have paid on business expenses. However, what happens if a business incurs costs before they register for VAT? Can they still reclaim the VAT they paid on those expenses? This article will answer these questions and provide a detailed explanation of the rules and timeframes involved.
Reclaiming VAT on services
If you have made purchases on services before registering for VAT, you may still be able to reclaim the VAT on those purchases. You have 6 months to claim for services, but, there are certain conditions that must be met for you to be able to do so. Here are some examples of services you can make VAT reclaims for:
- Accountancy and bookkeeping
- Legal services/lawyer fees
- Marketing – paid advertising, etc.
- Utility bills used for business such as Wi-Fi/phone bills, etc.
Firstly, you must have made the purchases for the purpose of your business, and not for personal use. HMRC will not allow you to reclaim VAT on services that are for personal use.
Secondly, you must have kept the relevant invoices or receipts to prove that you paid VAT on the services.
It’s important to note that if you received the services more than six months before registering for VAT, you will not be able to reclaim the VAT on those services. Additionally, if the services were used for both business and personal purposes, you will only be able to reclaim the VAT on the portion of the services used for business purposes.
For example:
If you use your mobile phone for business and personal use but only 30% of its use is for business, you can reclaim 30% of the phone bill each month.
Reclaiming VAT on goods
As a business owner, you can reclaim VAT on goods you bought up to 4 years before you registered for VAT. In this situation we’re talking only about stock and fixed assets that are allowable. This includes goods you either still have, or that were used to make goods you still have, such as:
- Inventory – stock/materials
- Equipment – laptop, printer, software, etc.
As mentioned in the section above about services, the goods must have been bought and used by the business (for business purposes) that will become VAT registered.
For example:
If you bought a laptop for your business in July 2022 you can reclaim VAT for it for up to 4 years from the date of purchase.
What purchases before VAT registration don't qualify for reclaiming VAT back?
As a business owner, it’s important to understand that not all purchases made before registering for VAT qualify for reclaiming VAT back. Some expenses that a business cannot reclaim VAT on include:
➡️ Anything that is not solely for business purposes, such as goods or services used for personal use.
➡️ Business entertainment expenses, such as meals or drinks taken with clients or suppliers etc.
➡️ Goods that you sold before you registered for VAT and from the effective date of the VAT registration they aren’t in business possession anymore
➡️ Services that don’t relate to the business’ taxable activities
➡️ Goods or services that are exempt from VAT
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How to claim VAT back on purchases made before registering for VAT
Claiming purchases made before registering for VAT is super easy. Providing you have the relevant records. You don’t need any extra forms, claims and contact HMRC. All you need to do is to include those purchases on your first VAT return. It’s that simple!
This means that the business will need to keep records of all expenses incurred before registering for VAT and the VAT paid on those expenses. These records may include invoices, receipts, and bank statements. And as a reminder, when running a business you have to keep your business records for a certain period of time regardless of whether you are VAT registered or not. But when you are VAT registered, you need to make sure your records show the VAT you paid if you want to claim it. Head over to our separate article about important elements on a VAT invoice to be confident your records are correct for the VAT purposes.
Businesses must keep records of all VAT they reclaim for at least six years after the date of the VAT return. These records may be requested by HM Revenue and Customs (HMRC) for inspection, so it’s important to keep your records in order.
The world of VAT and tax can be mind-boggling at times, right? That’s why at Joanna Bookkeeping we support businesses just like yours by explaining exactly what VAT is, and what your responsibilities are as a business owner. If you want to avoid getting stuck in red tape and make sure everything is done correctly, then book an initial call with our Oxford accountant to see how we can help.
Frequently Asked Questions
No. Only VAT-registered businesses can charge VAT. However, when registering for VAT there will be a period where you will submit your VAT registration and then you’ll be waiting for your VAT number. During this period, you are registered for VAT even if you haven’t received your number. It means you will have to pay VAT to HMRC on your vatable services and products but you won’t be able to show the VAT charged on your invoices. It’s because you aren’t allowed to show VAT to your clients without having the VAT number. Once you receive your VAT number, you can then re-issue the invoices to show VAT.
No, you pay VAT on sales once you’re registered for VAT. This is not the same date as the date when you receive your VAT number though! Receiving your VAT number can sometimes take even a few months, but only because you haven’t received your VAT number yet, it doesn’t mean you aren’t VAT registered. You are only waiting for the number to be able to include it on your sales invoices.
You can claim VAT on purchases that relate to both goods and services. But only providing they relate specifically to the business. So personal expenditure is disallowed. If you claim VAT on the goods, you still have to own these goods.
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