You’ve begun a new business venture. It’s far from a sure thing but if it works it could be very profitable. To get it off the ground there are significant pre-trading costs on which you’ll be paying VAT. How do you maximise the VAT recovery?

Start-up costs

The set-up period and associated costs will vary depending on the type of business you’re starting. These costs are painful while there’s no income being generated. One way to reduce the start-up expenses is to recover the VAT you paid on them. You’ll need to be VAT registered for this.

VAT registration

The good news is that you’re entitled to register even before you’re ready to start selling goods or services. As long as there is economic activity, such as purchasing goods or services for future trading, you are “in business” which means you can register voluntarily. HMRC calls this an intending trader registration. Once registered as an intending trader you must submit returns in the same way as active businesses. This allows you to claim a refund of VAT paid on set-up purchases.

Tip. If for any reason your business never starts trading HMRC can’t claw back any of the VAT you’ve reclaimed. For this reason it’s far better to register as an intending trader and recover VAT upfront rather than leave registration until trade begins as you could lose your chance to reclaim some or all of it.

Proving your right to reclaim

Although spending money on business preparation costs gives you the right to register, the general rules only allow you to reclaim VAT on purchases if they’ll be used to make VATable supplies. Being registered alone isn’t enough to allow you to reclaim VAT.

HMRC will make a big deal of asking for evidence to show you have a genuine intention to make taxable supplies before it will register you. Note. It requires more evidence if your intended trade is property development.

How long do you have?

In theory, there’s no time limit on how long you can remain registered as an intending trader. The longest period we know of was over three years, but that was an unusual case where the trader needed to obtain government licences before it could start making sales. That case highlights the importance of registering as an intending trader as soon as you can even if the business is speculative. The company in question would have missed out on VAT claims running into tens of thousands of pounds had it left its application until it was sure it was going to be able to trade.

Tip. Remember, it’s the intention to trade that gives you the right to register, not the feasibility of its success.

Tip. If HMRC refuses to register you as an intending trader, you can either appeal against its decision, or you can reapply when it’s clearer that the business is getting off the ground.

Pre-incorporation

A company can’t be VAT registered before the date of incorporation. However, it’s usually possible for those who will be directors to personally register as intending traders before incorporation.

This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.