Q: I have not registered for VAT as my turnover is just below the VAT threshold. In the last five years, I have incurred significant setup costs. Can I backdate a voluntary VAT registration and recover these?


A: Businesses only have limited rights to recover input tax retrospectively, so consideration should be given to the date of registration as you can normally only go back four years for recovering the VAT on goods still on hand at the date of registration and six months for services.

Provided that there was an entitlement to be registered a business can ask for a retrospective voluntary registration at the time of its application for registration. This can be backdated up to a maximum of four years prior to the date the application is received.

In effect, this means the business can then claim back VAT incurred up to eight years ago on goods still on hand on its first VAT return: by backdating the registration four years and then being able to go back another four years prior to the registration date.

The provision to negotiate an earlier date of registration is contained in the VAT Act 1994.  Schedule 1, paragraph 9(a), entitles a person who is not, and is not required to be VAT registered to register for VAT if he can satisfy HMRC that he is in business and is making taxable supplies.

Clearly where an earlier date is requested then output tax should be accounted for on any supplies made. The payments received would be treated as VAT inclusive and the VAT fraction of 1/6th should be applied to extract the VAT out of the amount.

An alternative is to issue VAT only invoices in an attempt to recover the VAT which should have been charged i.e. adding 20%. This is appropriate where the customers can recover VAT and there is a reasonable prospect that at least some of the invoices will be paid. It is recommended that business checks with its customers prior to issuing VAT only invoices. However, if payment is not received, bad debt relief can be claimed after 6 months. The bad debt relief claim in relation to a VAT only invoice is restricted to the VAT fraction of the VAT only invoice. It may seem unfair that the bad debt relief available on a VAT only invoice is restricted to the VAT fraction of the invoice. However, a VAT only invoice needs to be seen in the context of the total amount paid/ payable by the customer.


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