HMRC have formally clarified reclaims of VAT under Regulation 111 of the VAT Regulations 1995. Within set time limits, this will now allow VAT to be recovered on business assets on hand at the date of VAT registration provided the assets were intended for business use when the VAT was incurred. The time limit for goods is four years.
Where a business deregisters due to reduced turnover, output tax on goods on hand at de-registration may have to be declared under Paragraph 8 of Schedule 4 of VATA 1994. This is a deemed self-supply when a person ceases to be VAT registered.
If the business turnover increases again after de-registration the business may once again become a taxable person and have to register for VAT. If this occurs, and to the extent that the goods are still held and will be used in the new VAT registration, VAT on the deemed supply at de-registration can be considered when establishing an input tax claim under regulation 111.
Although there will be no VAT invoice to support any such claim, HMRC will allow alternative evidence to reclaim the VAT on registration. HMRC will accept proof that payment of VAT on the deemed supply was made to HMRC on de-registration. This will be accepted as alternative evidence in support of an input tax claim, allowing deduction under regulation 111 of the VAT Regulations 1995.
Input tax claims where the goods fall under the capital goods scheme must, however, be made under the capital goods scheme. Capital goods scheme items will not be subject to the four year time limit.