Did you know that if you have registered your business for VAT, you can claim any VAT you paid before your effective date of VAT registration (EDR)? This is called pre-registration VAT and it can add up to a very high VAT return if you take the time to understand how it works and how to claim it back correctly.
However, before we dive into how pre-registration VAT works, a quick reminder on VAT, what it means, what the threshold is, and how to register:
VAT is a tax placed on almost all goods and services sold by a business to other businesses and consumers and the amount of VAT you pay is dependent on how much it costs, the sector you’re in, and the type of VAT you registered for your business. If you don’t register for VAT and your turnover exceeds the VAT threshold determined by HMRC – £85,000 annually – then you are liable for a fine from the tax authority, which could potentially place your business at risk. Once you exceed or reach the VAT threshold, you will need to register for VAT. This is a relatively easy process, just follow our step-by-step online guide.
Now, for the definition of pre-registration VAT:
Your company can claim back VAT on goods you purchased up to four years before you registered for VAT, or you can claim VAT back on services you purchased up to six months before you registered for VAT. However, this is subject to certain conditions that must be met before you can undertake the claim.
That said, if you take the time to determine which goods and services are eligible for pre-registration VAT and have the requisite paperwork, you stand to save a significant sum of money for your business.
Can I Reclaim VAT on Purchases I Made Before Registering?
As mentioned above, you can claim VAT back on certain goods and services your company purchased before registering for VAT. For goods, it can be up to four years prior to registering, while for services, it can be up to six months. The VAT you spent can be reimbursed to your business if you meet the following conditions:
- The company you used to purchase these goods and services is the same company that just registered for VAT. You can’t use another company’s expenses to claim this VAT back, it has to be the same one that purchased the goods and services.
- The goods and services you purchased for your company are for business purposes.
- You are still using the goods or services within your business – or you are using them to make other goods and services you still have in your possession. For example, if you purchased office furniture four years before registering your company for VAT and you paid VAT for that furniture, then these qualify as fixed assets that can be reimbursed to your newly registered business.
Understanding Pre-Registration VAT rules
Several rules apply to your being able to benefit from pre-registration VAT. The HMRC VAT Input Tax guidelines offer detailed insight into the terms and conditions that come with this process, but here are some of the important highlights:
- You cannot claim back pre-registration VAT on goods or services that fall outside the time limits.
- If your business received a back-dated VAT registration date, then you will use this date to determine your time limits and the validity of your pre-registration VAT claims.
- You don’t need to reduce the amount of VAT on fixed assets that have been used or depreciated. For example, HMRC explains that if you purchased a van three years before you registered for VAT, you could still recover the full amount of VAT, even though you have used the vehicle.
- You must claim this pre-registration VAT back on your first VAT return. It is advisable that you set aside time to complete this paperwork well in advance of your first return so you can fully benefit from this opportunity.
- You cannot claim back VAT on any services or goods you purchased for your private use or non-business-related use cases.
Eligibility for Pre-Registration VAT
Your business is eligible for pre-registration if you meet all the rules and conditions outlined above; however, here is more detail about how you can manage the process and identify which goods and services are applicable.
Goods and Services Applicable for VAT
When you want to claim pre-registration VAT on goods such as raw materials, finished goods, fixed assets or stocks, then you can do so if:
- Your business purchased them within the past four years. If they are stocks used for resale, they must have been provided to another VAT-registered company.
- They were used for business purchases and you can provide proof of stock quantities, purchase dates and costs, the amount of VAT paid, and how they are used/were used by your business. You will need proof of purchase for all goods you plan to submit for pre-registration VAT, along with precise descriptions and use cases within your company.
- When you want to claim pre-registration VAT on services, you need to prove they were supplied to the business, were used by the business in connection with its own VAT or tax-related activities, and their proof of purchase.
Exceptions and Exemptions
The time limits applied to both goods and services – four years and six months respectively – do not apply to capital items under the Capital Goods Scheme. If you are part of this scheme, then you may be allowed to recover VAT for up to 10 years prior to your registration, depending on the asset.
HMRC defines capital items as:
- Land, buildings and civil engineering work or capital expenditure related to these areas of business where the value exceeds £250,000
- Ships, boats or other vessels and aircraft where the value is more than £50,000
- Items of computer hardware with a value of more than £50,000
In addition, a limited company isn’t allowed to register for VAT until it is completely incorporated and follows its own set of clearly defined rules that also abide by the time limits set out above.
Detailed Process of Pre-Registration VAT
Want to know how to submit your information and manage your pre-registration VAT process? These steps will help you out.
Preparing to Apply for Pre-Registration VAT
Now that you know you can claim back a significant amount of money thanks to pre-registration VAT, you must prepare everything you need to ensure you claim correctly from HMRC.
First, it’s important to note that you can only claim this back on your first VAT return, so ensure you have everything ready before you hit Submit, otherwise you could lose out. This means gathering all the required documentation and proof required by HMRC to determine the validity of your claim.
Necessary Documents for Pre-Registration VAT
The following is a list of everything you need to submit to HMRC when you claim pre-registration VAT:
- Proof of purchase in the form of invoices and receipts
- A summary of how these goods and services are used by, connected to, and relevant to your business
- The date of purchase for each item and service
- A description of each good and service
You’ve got the paperwork and you’re ready to submit, so follow these simple steps to get your pre-registration VAT submitted perfectly.
- Gather all your paperwork and numbers, including those for your standard VAT return
- Understand the output VAT you have collected on your sales
- Collect all the paperwork that provides the tax authority with insight into your total purchases
- Use the correct software to submit your VAT return correctly to HMRC
- Complete all the boxes relevant for your first VAT return and ensure you complete the ones that take you through the pre-registration VAT process
Post Pre-Registration VAT Procedures
Once you’ve completed your first VAT return, you can no longer submit claims for pre-registration VAT. However, you’ll still need to submit your VAT returns regularly, so this quick guide will help you submit your VAT returns perfectly.
Filing Regular VAT Returns
These steps will guide you through the process, but if you want an in-depth guide, follow our blog post on VAT return guidelines.
- Have the right software
- Ensure you have gathered all the right paperwork and kept accurate records
- Keep all your receipts, including debit and credit notes, bank statements and more
- Follow the steps in your HMRC VAT online return to ensure you have followed the process correctly
Blue dot’s VAT Reclaim Solution for Business Owners
Having an accountant and the right software will go a long way towards helping you submit fantastic VAT returns and ensure you claim your VAT back correctly. The same goes for the right technology, which is exactly what Blue dot provides. The Blue dot VAT reclaim solution for business owners is designed to save you money by ensuring you are compliant and don’t lose out due to unexpected errors.
VATBox by Blue dot identifies and calculates any eligible and qualified VAT spend allowing you to optimise, manage and analyse your company’s global and local VAT recovery processes while identifying unclaimed returns and avoidable costs.
Conclusion: Key Points About Pre-Registration VAT
Don’t forget that your company could be eligible for pre-registration VAT! You can save a lot of money if you correctly submit a pre-registration VAT claim, which your business can use to invest in its growth and capabilities. Don’t see pre-registration VAT as admin work, instead, recognise it as a strategic financial approach that can make a huge difference to your business.