Can you reclaim VAT on start-up costs?
You have just set up a new business, but as you invest in the product development and branding, you won’t be making any sales for some time. What is the position when it comes to claiming VAT on these start-up costs? Associate Kenny Logan from our Edinburgh office explains.
New venture
As a rule, businesses can only reclaim VAT they incur in connection with making taxable (VATable) supplies. However, that’s not necessarily true when it comes to a new business which hasn’t started selling goods or services yet.
Multiple trades
If you are self-employed and already registered for VAT, then your new business is automatically covered by the same registration. This allows you to reclaim VAT on the start-up and development costs of the new business by including them on the VAT return for the existing business.
However, if you’ve formed a company, it is completely separate to you for tax purposes and will need its own VAT registration.
Separate companies (or companies and unincorporated businesses) can apply for group registration if conditions are met. This means that more than one business can be covered by a single registration and therefore VAT paid on start-up and development costs can be reclaimed via a single VAT return.
Alternative option
If this is your only business or you don’t want to go down the VAT group route for companies, all is not lost. You can still voluntarily register for VAT before the business begins to generate income and therefore recover VAT on your start-up costs.
You can voluntarily register for VAT as an “intending trader”. As the name suggests, this is available for businesses that intend to make taxable supplies in the future. So, if you’re developing a business, you can register for and reclaim the VAT paid on costs. But you will need to provide evidence to HMRC alongside your application to prove your intentions.
However, the VAT must relate to costs that the business would be entitled to claim if they had been incurred after the business started making sales. For example, the VAT paid on business entertainment costs is blocked and can’t be reclaimed by a registered business. Therefore, an intending trader is similarly blocked from reclaiming it.
Retrospective registration
You can ask HMRC to backdate your VAT registration, to enable you to reclaim VAT on costs already incurred. The request must be made alongside your application to register as an intending trader.
The registration can be backdated up to four years from the date of your application, if you can prove that there was also a firm intention to make taxable supplies at the earlier date.
After registering as an intending trader there’s no time limit on how long you have to start making sales. However, if there’s a long delay HMRC will ask you to prove you still have a genuine intention to trade.
IN SUMMARY
You can apply to HMRC to voluntarily register for VAT as an intending trader. Once registered, you can reclaim VAT on any costs that would ordinarily be allowed if your business was trading. If you’ve already incurred costs, you can ask HMRC to backdate your registration when you apply.
Please do contact the JRW Hogg & Thorburn team for any further information and queries you may have.
