HM Revenue and Customs (HMRC) has changed the way it interprets important rules regarding the payout of reclaimed VAT. The result is that newly-registered businesses are to lose out on some of the VAT they could have reclaimed after the old interpretation, which has been in use for the past 43 years.
The rules in question apply to businesses which register for VAT and already hold stock or assets which was procured before their registration, but is intended for use after their VAT registration date. For more than four decades, HMRC have interpreted the rules in such a way as to allow for the full amount of VAT paid on that stock to be reclaimed.
Now, however, HMRC has reinterpreted these rules and decided they should instead be applied pro rata. This means that many businesses will lose out on VAT that could previously have been reclaimed.
This applies when the items in question have already been used by the business before their VAT registration date. The amount of VAT that can be reclaimed is to be reduced in proportion to the amount of use that the assets gave to the business before it was VAT registered. For instance, supposing a business owns a piece of equipment which it has used for two years before registering for VAT and expects to continue using for a further four years. Two thirds of VAT can be reclaimed, to reflect the amount of that equipment’s usage that takes place after the business has registered, and the remaining third will not be refundable.
Under the old interpretation of the rules, the business could have reclaimed the full amount of VAT paid on that equipment despite the fact it had made use of the asset before being VAT registered.
Chas Roy-Chowdhury, head of taxation for the Association of Chartered Certified Accountants (ACCA), was critical of HMRC’s decision to change the way in which it interprets these rules. Aside from describing the move to the new interpretation as a “mean” one, he also believes that the change was not given the amount of publicity that it should have received.
“It’s pretty mean if they’ve changed the interpretation on that because clearly if a business is waiting for its VAT registration, it’s not in its own hands to speed that process up,” he said. “It’s something that will affect businesses and their cashflow, although they won’t be charging VAT until they receive their registration.”
HMRC, however, defends its decision to implement a new interpretation of these VAT rules, believing the new approach is fair. In a statement, a spokesperson for HMRC said: “Where a business has goods and assets on hand at its date of VAT registration, an adjustment ought to be made where these have already been used. Where such adjustments have not been made, the business should do so on their VAT return or make a voluntary disclosure to HMRC.”