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HMRC Changes Interpretation of VAT Rules

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HMRC has decided to change the way it interprets key rules surrounding VAT, replacing the previous interpretation which has been used for 43 years. Many newly- and recently-registered businesses could be left unable to reclaim VAT which they would have been able to claim back under the previous interpretation.

The rules relate to businesses who newly register for VAT, specifically those businesses which have assets, including stock, purchased before their registration but which will be used afterwards. The rules allow them to reclaim VAT paid on the purchase price of these items, as they would with items purchased after their registration date.

Up until now, and for the past 43 years altogether, HMRC has interpreted these rules in a very straightforward way. VAT-registered businesses can reclaim VAT on many purchases. After registering for VAT for the first time, they have been able to fully reclaim VAT on all stock, equipment and other assets that they already hold and will be using after their registration date. However, HMRC has decided to change its interpretation of these rules and instead apply the right to reclaim VAT on a proportional basis.

Instead of reclaiming all of the VAT they paid, as before, businesses will now only be able to reclaim a percentage of VAT for each purchase that reflects the amount of usage that took place before their registration date and the amount of usage that takes place after.

For example, supposing a business holds a piece of IT equipment at the time of their registration, which they expect to use for a total of five years before replacing. They have already been using this piece of equipment for two years, meaning that they expect to continue using it for a further three years after registering.

Previously, HMRC interpreted the rules as meaning that this business would be able to reclaim all of the VAT on the purchase of that piece of equipment, because they would continue to use it as a VAT registered business. Now, however, the amount of VAT that can be reclaimed would be applied pro rata of the amount of use taking place after the registration date, meaning they could only reclaim three fifths or 60% of VAT.

A number of professionals have criticised this move on the part of HMRC, including the Association of Chartered Certified Accountants’ (ACCA) head of taxation Chas Roy-Chowdhury who said: “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.”

Roy-Chowdhury continued: “It’s something that will affect businesses and their cashflow, although they won’t be charging VAT until they receive their registration.”


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