Recovering VAT Incurred Prior to Registration

VAT Question

Our client operates a car repair centre and ran this as a sole trader for several years. As his turnover increased, he incorporated the business and started trading through the company on October 10, 2023. We have recently found that the client exceeded the VAT registration threshold, so we have now registered the client for VAT with a date of registration of 1/1/2024 and are now in the process of completing the client’s first VAT return. Can we claim VAT incurred on the assets within the company as long as they were purchased no more than 4 years prior to registration?  

VAT Answer

This is a very common question; unfortunately, the simple answer is no, or at least nothing purchased while the business was operating as a sole trader prior to incorporation.

The reason is that the VAT Regulation governing the recovery of VAT incurred prior to registration only allows the taxable person (meaning the legal entity that is registered for VAT) to recover VAT incurred prior to registration. 

In the client’s situation, any purchases made prior to the company beginning to trade as a business on 1/10/2023 are purchases made by the sole trader, who is not the taxable person that is now registered for VAT. 

Therefore, any VAT incurred on purchases made prior to 1/10/2023 is not claimable by the company, as the VAT was not incurred by the company, even if the goods or assets are now within the company and it is now too late to do anything about it.

This is in fact a crucial area of VAT planning that can allow maximisation of VAT recovery in the following way:

The VAT incurred on goods or assets purchased prior to 1/10/2023 would have been claimable by the sole trader, subject to the other usual rules governing recovery of VAT incurred prior to registration. If the sole trader had voluntarily registered for VAT shortly before incorporating his business,

Subsequently, as long as the company had their own voluntary VAT registration agreed upon by HMRC before the company took over trading the business, the transfer of the business would be a TOGC, and no VAT would be due in regard to the transfer of the business.

The trade-off is that sales will be subject to VAT earlier than required. The savings of being able to claim the VAT incurred by the sole trader on assets, which could be significant, could make this planning beneficial.