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HMRC have explained their policy on claims for VAT on goods on hand at registration that are received from persons who were previously registered for VAT, de-registered and have now re-registered.
When taxable persons register for VAT they often bring assets into the tax system. Regulation 111 of the VAT Regulations 1995 allows VAT to be recovered on such assets within set time limits and with normal evidence of purchase, normally a VAT invoice, provided the assets were intended for business use when the tax was incurred.
Where a taxpayer de-registers due to reduced turnover, they may have to declare output tax on goods on hand at de-registration on which they have claimed input tax (VATA 1994, Sch 4 para 8).
This is a deemed self-supply designed to ensure that future consumption of the assets, as a non-taxable person, is properly taxed.
If the turnover subsequently increases after de-registration, it may be necessary to register the business again for VAT.
In such cases – to the extent 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 reg 111.
As there will be no VAT invoice to support any such claim, legally no input tax deduction has been possible – although the Revenue has allowed, by informal concession, claims for relief on goods on hand from persons who were previously registered for VAT under the same legal entity.
The department now considers that its discretion to allow alternative evidence as set out in reg 29(2) can be applied to claims under reg 111.
The taxman has therefore revised the policy and accepts that where proof that payment of VAT on the deemed supply was made to HMRC on de-registration, it will be accepted as alternative evidence in support of an input tax claim.
As a result, the informal concession has been rendered obsolete and has been withdrawn immediately.
It should be noted that under reg 111 such a deduction will not be available if it is outside the time limit specified (four years for goods) or if the goods were not intended for business use at the time of the deemed self-supply on de-registration.
The most likely reason for this is that the business ceased altogether at this point.
It will also not apply if the asset is a capital item falling within the capital goods scheme (land or buildings costing over £250,000, computer equipment, ships or aircraft costing over £100,000). Instead any input tax deduction must be under the capital goods scheme.
