When a business registers for VAT the VAT rate should be added to all sales from the date of registration. The standard VAT rate is 20 per cent of the sales value. The value added tax added to sales is known as the output tax.
Value added tax paid to suppliers on purchases is known as the input tax. When completing the VAT form the amount paid to HMRC is the total output tax after deducting the input tax.
VAT on goods purchased up to three years prior to VAT registration can be reclaimed against the output tax liability. A business can also claim VAT paid on services incurred up to 6 months before vat registration.
To be able to claim VAT paid before the VAT registration a business must have kept VAT accounting records of items bought and sold to enable the business to claim VAT on those items still in stock at the time of the company became VAT registered. The VAT claim for goods and services incurred before registration should be made on the first VAT form after VAT registration.
Claim VAT on Goods Purchased Prior to the VAT Registration
A business can VAT input on purchases made by that business for up to three years prior to VAT registration provided those goods are also available for resale either as stock, raw materials or work in progress at the date of the VAT registration and do not relate to exempt items.
If the goods were bought by another business, for example, pre incorporation then the VAT claim would not be allowed. The VAT claim would also be disallowed if the goods purchased have already been sold. In the same context VAT on items such as petrol, gas and electricity would also be disallowed if they have been consumed prior to VAT registration.
The VAT claim is restricted when goods are used for personal and business purposes. The restriction being the proportion those goods are used for non business purposes.
Claim VAT on Services Purchased Prior to the Vat Registration
VAT registered companies can VAT input on purchases made by that business for up six months prior to VAT registration provided those services do not relate to exempt items or goods that have already been sold before VAT registration.
The services must have been bought by the registered business and as with goods purchased only the business proportion may be claimed.
VAT Accounting Records
In order to claim VAT on goods and services purchased prior to registration the business must have kept accounting records which include valid VAT invoices and there should also be an audit trail through the accounting records to support the completion of the first vat return.
When the first VAT return is submitted and contains a large refund it is not unusual for the HMRC VAT office to inspect the VAT accounting records before authorising a refund payment.
The VAT accounting should also include detailed stock records to demonstrate the goods on which VAT is being reclaimed existed at the time of registration and also show when goods have been disposed of after registration
Detailed VAT accounting records must also be kept of any services on which the VAT claim is based. Those records stating the date received, description and should be capable of supporting the fact those services had been or would be sold after the vat registration.
If the items being sold are exempt from VAT then the value added input tax cannot be claimed. If part of the goods and services being sold are exempt then only the proportion not exempt may be claimed.