HMRC has clarified its policy on the correct treatment of VAT incurred by a business prior to its VAT registration.

Businesses registering for VAT are allowed to recover the tax they have incurred on goods and services before their effective date of registration (EDR) provided the goods or services are used or “consumed” within certain time limits.

Over recent years there has been a misinterpretation of the word “consumed”, particularly in relation to business assets. HMRC Business Brief 16/6 has been prepared to clarify HMRC’s position and ensure VAT on assets held prior to EDR is treated consistently.

Subject to the normal rules on VAT deduction, VAT incurred prior to registration may be recovered:

• in the case of services, where the services are received within 6 months of registration and used in the business at the date of registration

• in the case of stock, where the goods are still on hand at registration (apportionment may be required)

• in the case of fixed assets, where the assets remain in use by the business at registration

HMRC will amend its guidance to make this clear. In the meantime, taxpayers that have been adversely affected should consider whether an error correction may be made.

A copy of Revenue and Customs Brief 16/6 is available to view here.