VAT - 16.09.2014

Recovering pre-registration VAT on software

Pre-registration VAT

Businesses are entitled to reclaim VAT on purchases made before they became registered. There are, of course, conditions, the main ones being that:

• the business reclaiming the VAT is the same one that bought the goods or services in question
• the business entity is the same one that made the purchase, i.e. that it hasn’t changed from, say, a partnership to a company
• where the VAT relates to goods, these goods were purchased within four years of the date of registration and haven’t been used, sold or consumed at that date
• where the VAT relates to services, they were supplied to your business within the six months before registration.

Software

Before considering VAT paid on software bought prior to registration, you need to understand the different rules that apply to goods and services.

VAT on goods

The rules allow a business to reclaim VAT on pre-registration purchases of goods where they will result in a supply on which it will charge VAT.

Tip. VAT can even be reclaimed for items which were purchased and used before registration, as long as they continued to be used after registration to generate supplies (sales) on which VAT was charged. Typically, this will apply to equipment, e.g. a van, bought before registration, but which continues to be used after. Despite being used for for both non-VATable and VATable supplies, there’s no need to apportion your claim. You can recover 100% of the VAT paid on the van purchase.

Trap. VAT on goods bought more than four years before registration can’t be reclaimed and the time limit for VAT paid on pre-registration services is just six months.

VAT on services

In practice, it’s difficult to say for certain whether a service paid for prior to registration, e.g. rent, resulted in VATable supplies after registration. It’s for that reason the rules only allow recovery of VAT on services bought up to six months previously.

Software - goods or services?

The VAT position on software is tricky as it can count as either goods or services depending on how it’s supplied, i.e whether it’s downloaded or in physical format, e.g. on a CD. If it’s supplied on a disk etc. it’s goods (with one exception - see The next step ), but if it’s downloaded it counts as services. This difference can be important where the software is bought before registration because of the different time limits for goods and services.

Tip. If you expect to register your business for VAT, but not within the next six months, buy software on a CD rather than download it, if possible. That way if you’re still using it when you register within four years you’ll be able to reclaim the VAT.

For information on when the purchase of software doesn’t count as goods, visit http://tipsandadvice-tax.co.uk/download (TX 14.22.07).