VAT Update – Winter 2024

Paula Mason, VAT Manager at Scrutton Bland takes a look at the latest VAT updates and news for Winter 2024.

Pre-Registration Input Tax

After registering for VAT, it’s important to consider whether VAT can be recovered on expenses that were incurred before the effective date of registration.

HMRC allow businesses to treat VAT incurred before registration as if it were input tax, if the goods and/or services were purchased to support their taxable business activities.

So, VAT can be recovered on goods purchased in the four years before registering for VAT if:

• they were purchased by the VAT registered entity;
• they are used in the taxable business of the VAT registered entity and have been since purchased;
• they are either on hand at the date of registration or have been incorporated into other goods that remain on hand.

Some examples of such goods would be fixed assets purchased less than four years before registration and still in use at registration, and stock in hand at the date of registration.

VAT can be recovered on services purchased less than six months before registering for VAT if:

• the services relate to the taxable business.

When calculating how much VAT can be reclaimed, consideration should be given to partial exemption and non-business use.

VAT cannot be recovered on expenses that are attributable to exempt supplies, either fully or partially. And the partial exemption de minimis limit is not applicable to partial exemption calculations for pre-registration expenditure.

For example:

VAT suffered on a van purchased 3 years before registration that’s used wholly and exclusively for what would be taxable supplies before registration and taxable supplies after registration is recoverable in full.

VAT suffered on a van purchased 3 years before registration for private use only and only used in relation to taxable supplies after registration would not be recoverable.

In addition, if the date of registration is backdated for any reason, then the time limits will be up to 4 years for goods and up to 6 months for services before the amended effective date of registration.

Exceptions for Private Schools

With supplies of education by private schools changing from exempt to standard rated from 1 January 2025, HMRC are allowing some recovery of pre-registration VAT which would otherwise be irrecoverable under the normal rules (so, nil recovery as goods or services purchased related wholly to exempt supplies).

HMRC are allowing goods to be apportioned using an economic life of 5 years with the exempt use portion being restricted, and recovery applying to the taxable use portion after 1 January 2025.

For example:

Sports equipment was purchased by a private school on 1 August 2023 with VAT incurred of £1,000.

The school registered for VAT on 1 November 2024 and its first tax year starts on 1 April 2025.

Giving the asset an economic life of 5 years, calculates that VAT of £250 (£1,000/60 months x 15 months) covering the period 1 August 2023 – 1 November 2024 is not recoverable.

In relation to the remaining £750 of VAT, 2 months (1 November 2024 to 1 January 2025) will be related to exempt supplies and 3 months (1 January 2025 – 1 April 2025) will be related to taxable supplies.  Therefore the amount of VAT recoverable is £450 ( £750/5 months x 3 months).

VAT Case Law Update

DIY Housebuilder Scheme

In Brian Lawton (“BL”) v HMRC [2024] TC09309 – it was found that two DIY Housebuilder VAT reclaims could not be made where a barn conversion had been undertaken in two parts.

BL had planning consent for a barn conversion including a small single storey extension.  Only the barn conversion was carried out and following the issue of the completion certificate, BL made a claim under the DIY Housebuilders Scheme which was approved and paid.

The following month, BL obtained planning consent for a larger single storey extension to his dwelling and after this was completed, BL submitted another claim under the DIY Housebuilders Scheme.  HMRC refused this claim so BL appealed to the First Tier Tribunal.

They found that:

• HMRC were entitled to insist only one claim could be made as there had been no repayment in error, no omission in error of invoices and works carried out before the claim was submitted and no invoices issued late by a contractor.
• HMRC were not obliged to review the planning consent to ensure all aspects of the development had been completed.
• The first claim was the only valid claim and was restricted to the stage of the development as confirmed by the completion certificate submitted.
• The second claim was not eligible under the DIY Housebuilders Scheme as it related to an extension to an existing dwelling.

The appeal was therefore dismissed.

For further details on either of the above updates or for personalised VAT advice contact Paula or one of the team on 0330 058 6559 or email hello@scruttonbland.co.uk