HMRC changes its interpretation on VAT reclaims

Key rules governing VAT refunds are in the spotlight with the UK’s HM Revenue & Customs changing its interpretation of key rules governing payouts.

Previously, thanks to a long-standing rule, businesses registering for VAT that already held stock and assets for use after the registration date could reclaim the full amount of VAT paid on those goods. However, now the HMRC is applying the rule on a pro-rata basis only, 43 years later. Input VAT should now be reduced to take into account how the goods have been used before the VAT registration date.

An HMRC spokesperson has clarified in trade media that there has never been any changes to the rules, but the interpretation was changed in 2011 following discussions at the Joint VAT Consultative Committee forums. The exact date of change cannot be confirmed as the record of updates only goes back to February 2012.

The UK law is set out in VAT regulation (SI 1995/2518) reg. 111, which doesn’t mention the need to restrict input VAT in respect of the use assets have already been put at the registration date.

ACCA head of taxation Chas Roy-Chowdhury told Accountancy Age that such a change is "mean" and that greater publicity should have been given to the move in any case: "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.”

Some tax advisers and taxpayers could potentially have been over-claiming input VAT on new registrations as the change was never widely publicised. The impact could affect businesses and cash flow, as well as cause delays in major purchases until after registration.

There has been no change in practice for VAT reclaims on services, which must be provided in the six months before registration.  

TMF VAT experts say: "From our point of view, these changes in interpretation highlight the fact that it is becoming increasing more important to keep up to date with the changes in legislation. There are many businesses which are not aware of this change and specialists like ourselves can help keep companies informed and insure that mistakes are avoided."

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