HM Revenue and Customs Brief 16/16 - VAT incurred on assets
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Published 4 November 2016
Treatment of VAT incurred on
assets that are used by the business prior to VAT registration
Purpose of this brief
This brief sets out HM Revenue and Customs (HMRC) policy on
deduction of VAT relating to assets used by the business prior to its
VAT registration. It clarifies when, and to what extent, VAT is
deductible and what to do if the correct treatment has not been applied.
This revenue and customs brief is aimed at all businesses and
professional tax advisors.
UK law allows a business registering for VAT to recover tax
they have incurred on goods and services before their effective date of
This allows the recovery of VAT against goods and services as long as
they’re used by the taxable person to make taxable supplies once
Services must have been received less than 6 months before the
for VAT to be deductible. This time limit simplifies the rules and
means you don’t need detailed calculations of the use before and after
This excludes services that have been supplied onwards. VAT on services
received within the relevant time limit can be recovered in full.
We also have a simplified rule for goods. Goods have a 4 year
time limit for deduction that is consistent with the general ‘capping’
provisions. This excludes goods that have been supplied onwards or
consumed before EDR.
However, VAT on fixed assets purchased within 4 years can be recovered
The word ‘consumed’ has been interpreted inconsistently over
time, particularly in relation to business assets. This brief clarifies
the policy position.
policy hasn’t changed and is as set out below. This brief has been
issued because VAT on assets held prior to EDR
hasn’t always been treated consistently.
Subject to the normal rules on VAT deduction:
- VAT on services received within 6 months of EDR and
used in the business at EDR
is recoverable in full
- VAT on stock is deductible to the extent that the goods are
still on hand at EDR
(for example apportionment may be required)
- VAT on fixed assets purchased within 4 years of EDR is
recoverable in full, providing the assets are still in use by the
business at EDR
Full recovery only applies if your business is fully-taxable.
If you’re partly-exempt, have non-business activities, or need to
restrict VAT deduction for any other reason, you’ll need to take that
into account when calculating your deductible VAT.
There are different rules for capital items under the Capital
Goods Scheme. Please see VAT Notice 706/2 for details.
will accept corrections for overpayment of VAT in the following
- the business has reduced the VAT it deducted on fixed
assets, to account for pre-EDR use
has raised an assessment of tax to account for pre-EDR use
of fixed assets
has reduced a repayment claim to account for pre-EDR use
of fixed assets
will consider claims for repayment of penalties and interest charged as
a result of assessments.
Time limits for error correction in relevant cases:
- 4 years from the due date of the relevant VAT return where
VAT deduction has been restricted in error by the business, or HMRC has
incorrectly reduced a repayment
- 4 years from the date the assessment was paid where HMRC have raised
an assessment that incorrectly restricts VAT deduction
Corrections of errors, other than assessments, should be dealt
with as per the guidance in section 6 of VAT Notice 700/45.
Claims relating to VAT paid on assessments raised in error
should be made on an Error Correction Notice (form VAT652) as per the
guidance in section 4.4 of VAT Notice 700/45.
About the Author
© Crown Copyright 2016.
A licence is needed to reproduce this article and has been republished
for educational / informational purposes only. Article reproduced by
permission of HM Revenue & Customs.
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Article Published/Sorted/Amended on Scopulus 2016-11-07 00:00:00 in Tax Articles