You’re in the planning stages of a new business but it might be a year or more before it’s off the ground. In the meantime start-up costs will be significant. What are your options for recovering VAT on these and which is the best?
To register or not to register
As a business owner, sometimes the decision on when to register for VAT is out of your hands. You have no choice because your turnover exceeds the registration threshold. Where that’s not the case, traders often defer registering for two reasons: they can remain more competitive on prices if they don’t have to charge VAT; or they assume that registering for VAT will cost them. Generally, the second reason is not a good one - it’s wrong.
Tip. If your business is one that is not especially sensitive to pricing, registering for VAT is advantageous as it reduces your costs by the amount of VAT you reclaim. The only disadvantage is you’re required to complete and file VAT returns.
Get the VAT back
Having dispelled the myth about registration you need to decide the best time to register to maximise VAT recovery.
Option 1 - pre-registration purchases. It’s fairly common knowledge that once registered you can reclaim VAT paid on purchases of goods and services made earlier. Broadly, for goods, e.g. equipment or stock, you can look back four years or to the start of your business if that’s more recent, and reclaim the VAT on purchases. For services, you can go back just six months.
Trap. In both cases there are conditions and the most important of these relates to goods; you must still have them on hand at the date of registration if you want to recover VAT. This means you can’t reclaim VAT on items that you bought and sold, scrapped or consumed before you registered.
Option 2 - retrospective registration. As an alternative to option 1 you can backdate your registration by up to four years or, if more recent, the date your business started. This gets around the Trap above and the six-month rule for services.
Power tip. When you backdate your registration you also get the benefit of option 1. For example, if you decided in June 2025 to register with effect from April 2024, you not only have the right to reclaim VAT paid on purchases in that period but also for the four previous years for goods, i.e. back to April 2020 and for services six months back to October 2023.
Trap. You must account for VAT on any supplies of goods or services you made from the retrospective registration date. What’s more, if there is VAT payable on supplies it’s highly unlikely you’ll be able to go back to the person you made the supply to, which might be many months or even years before, and ask them to stump up the VAT. Therefore, the VAT on the supply will have to come out of your pocket.
Power tip. Option 3 avoids the shortcomings on options 1 and 2 - it’s called intending trader registration.
Option 3 - intending trader. As soon as you start planning your business you can register for VAT as an “intending trader”. You’ll have to complete VAT returns but the plus side is that any VAT on purchases you make which you intend to use to make future “taxable supplies”, i.e. those which aren’t exempt from VAT such as medical services, are reclaimable. None of the traps of the other two options apply and there’s a cash-flow advantage as you’ll be reclaiming VAT in real time instead of retrospectively.
Option 1 is to register and reclaim VAT on goods you purchased in the previous four years (six months for services). Option 2 is to register from an earlier date to extend the time limits for VAT recovery. Option 3 is to register as an “intending trader” as soon as you start planning your business. This has the advantages of both of the other options with an added cash-flow benefit.
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.