You have recently registered for VAT and are about to submit your first return. How do you ensure it is correct and how much input tax can you claim on pre-registration expenses?
HMRC compliance check?
Many first returns submitted will be net repayments, i.e. input tax exceeding output tax, and this could be for a number of reasons:
- stock and asset purchases for a new business with large amounts of input tax to claim
- you might have registered as an intending trader and only have input tax to claim and no output tax to declare
- there is a one-off opportunity to claim input tax on some pre-registration expenditure on the first return, which could turn a payment return into a net repayment.
HMRC allocates a lot of staff resources to check first repayment returns, mainly because it is concerned that a fake business might have been created in order to submit fraudulent claims.
Pro advice. If HMRC queries a repayment return, you must be able to prove that your business is genuine. Officers often request documents that give proof of trading, e.g. copies of business plans, rental agreements for premises, customer orders, contracts with suppliers, adverts to recruit staff and subsequent job offers that have been made.
Pro advice. Provide this information as soon as possible to prevent a delay in the repayment being made.
Intending trader registrations
You can register for VAT as an intending trader if you have a genuine intention to make taxable sales in the future. This will give you the chance to claim VAT on expenses as they are incurred and therefore improve business cash flow.
There is no time deadline between registering for VAT and making the first taxable sale. In some cases, it could be many years before a sale is made.
Growing trees to sell wood. There could be a ten or 20-year gap between planting trees and eventually selling wood or fruit.
Property venture. Purchasing the freehold of a derelict pub and spending two years renovating it before opening for business.
Pro advice. A common concern is whether HMRC might ask you to repay all input tax you have claimed on past returns if you decide to abort the proposed business project and never make any sales. The answer is “no” as long as you always had a genuine intention to trade. This policy is confirmed in VAT Notice 706 .
Pre-registration expenses
You can claim input tax on your first return on some pre-registration expenses. The rules and time limits are different for goods and services:
Goods. They must have been purchased within the four-year period before the registration date and have been used in the business during that time; they must be owned by the business on its first day of registration.
Services. The time limit for claiming input tax is six months before registration, and the service cannot relate to a sale that has been invoiced or consumed before the first day of registration.
Pro advice. You must sometimes decide if the best option is for you to register on a voluntary basis before the compulsory registration threshold has been exceeded, i.e. so that input tax on capital and other expenses can be claimed sooner, or wait until the threshold has been exceeded and then claim input tax belatedly on most expenses by using the pre-registration opportunity.
Pro advice. If you use the flat rate scheme from your date of registration, you can still claim input tax on their pre-registration expenses in the same way as a non-scheme user.
Example. Bill and Ben are sole trader builders working for private individuals, i.e. customers who cannot claim input tax. They both purchased a new van on 1 June 2022 for £40,000 plus VAT. Bill registered for VAT voluntarily on 1 June 2022 so that he could claim input tax on the van. Ben’s accountant advised him to delay registering until he had exceeded the compulsory annual sales threshold of £90,000, which was 1 June 2025.
If he still owned the van on 1 June 2025, Ben can claim input tax of £8,000 on his first return. This is three years later than Bill but he has benefitted from not needing to charge output tax on his sales during that time, an important outcome because his customers cannot claim input tax.
Are some goods really services?
The six-month time window for claiming pre-registration input tax on services is much stricter than for goods, so getting the “goods or services” decision wrong on the first return could mean that HMRC will issue an error assessment. You must also understand that input tax cannot be claimed on a service if it has been invoiced or consumed before registration.
Example. Betty trades as a hairdresser and registered for VAT on 1 April 2025 on a compulsory basis. She had spent a large amount of money twelve months earlier improving the facilities in her salon, e.g. installation of air conditioning; decorating work; electrical rewiring; plumbing works to improve the heating; and the construction of a small extension. Most of these works will be classed as construction services, even though they involve goods, such as bricks and glass in the extension, so input tax cannot be claimed on her first return because the costs were incurred more than six months ago.
Pro advice. The fact that you might capitalise construction services when you prepare their accounts is irrelevant.
Example. Andrea registered her computer consultancy business for VAT on 1 February 2025 and is completing her first return to 30 April 2025. She uses the services of Martha as a subcontractor on various projects and has included six months of Martha’s invoices in her pre-registration input tax claim, i.e. for invoices issued by Martha from 1 August 2024 to 31 January 2025. This is wrong because the work carried out by Martha related to jobs that were invoiced by Andrea before she registered for VAT, so input tax cannot be claimed.
Pro advice. If Andrea issued sales invoices for any jobs after she registered, then input tax could be claimed on any pre-registration services related to those jobs in the six-month period before she registered.
What about VAT schemes?
What’s the situation if you use a special VAT scheme?
Cash accounting scheme (CAS). If you use the CAS, you will only claim input tax when you pay your suppliers and account for output tax when your customers pay. You might have a lot of input tax to claim in your early days of trading, so it might be sensible to delay entry to the scheme until the cash-flow benefits are more worthwhile.
Annual accounting scheme. It may be worth waiting until trading patterns are established before deciding to use the scheme.
Flat rate scheme (FRS). If you adopt the FRS from your date of registration, there are two important issues. Firstly, you get a 1% discount on your relevant flat rate category for your first year of registration. Secondly, you should check each period if you are classed as a “limited cost trader” if you do not spend much money on buying goods. The draconian rate of 16.5% gives minimal credit for the input tax you cannot claim if you use the scheme.
Pro advice. You can only use the FRS if you expect your taxable sales excluding VAT will be less than £150,000 in the next twelve months. Historic sales are irrelevant; make sure you understand this limit before applying to join.
A large repayment on the first return may trigger a compliance check. This happens to many businesses, but they shouldn’t worry as long as they can show the business is genuine and is making, or intends to make, taxable supplies. You can recover input tax on goods and services acquired prior to registration, subject to conditions and strict time limits. The time limit for services is just six months, compared to four years for goods.