VAT Q&A: flat rate scheme and pre-registration input tax

In our regular Q&A series, Croner Taxwise consultant Jason Croke, explains the registration requirements for a first-time registrant planning to use the flat rate scheme for VAT compliance and recovery

Q. My company is about to register for VAT and wants to use the flat rate scheme as it meets the conditions and would be beneficial. The 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?

A. 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, according to VAT Notice 700 (section 11) and HMRC manual VIT32000, include:

  • for 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
  • for 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 prior to registration and there must not be work on goods bought more than four years prior to registration, nor 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. It should be noted that the partial exemption de minimis rules do not apply to VAT incurred pre-registration.

About the author

Jason Croke is a VAT consultant at Croner Taxwise

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