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Claiming of Pre-trading expenditure when using the Flat Rate Scheme

My client is about to register for VAT and wants to use the flat rate scheme as she meets the conditions and it would be beneficial to her. However, her intention is to register for normal VAT initially, in order to recover pre-registration input tax, and then after the first return has been filed, switch to the flat rate scheme. Is this acceptable or will HMRC challenge it?

Input tax incurred after the effective date of registration is not recoverable, under flat rate rules, with the exception of capital items costing more than £2,000 including VAT.

However, there is no need to switch VAT accounting schemes to recover pre-registration input tax.  HMRC Notice 733, confirms at para 7.6 that a trader using the flat rate scheme can recover input tax on goods and services prior to the effective date of registration (EDR) under the normal rules.

The normal rules for pre-registration input tax can be read in VAT Notice 700 (section 11) and in HMRC manuals VIT32000 –

  • in the case of goods (either stock for resale or fixed assets), the goods remain on hand at the date of registration and will be used in the newly registered business. These goods must have been bought within the time limit of four years, and
  • in the case of services, the supply was made not more than six months before the date of registration. Six months represents a period in which it is deemed that services obtained will relate to business activity carried on at the time of registration.

Services must not have been supplied on, for example, used to make a supply prior to registration; must not be work on goods bought more than four years prior to registration, and must not be work on goods no longer on hand at registration.

The amount of VAT that can be recovered is the amount that would have been deductible had the business been registered at the time the VAT was incurred. There is no adjustment to make for prior use and depreciation. Businesses need to consider partial exemption and non-business restrictions when calculating the amount to recover, and it should be noted that the partial exemption de- minimis rules do not apply to VAT incurred pre-registration.

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