The above Brief explains HMRC's policy on claims for VAT on goods on hand at registration that are received from persons who were previously registered for VAT, de-registered and have now re-registered the same legal entity.

When taxable persons register for VAT they often bring assets into the tax system with them. There is a provision that allows VAT to be recovered on such assets within set time limits (generally 4 years) and with normal evidence of purchase, provided the assets were intended for business use when the VAT was incurred. Evidence is normally in the form of a VAT invoice.

Where a taxpayer de-registers due to reduced turnover they may have to declare output tax on goods on hand at de-registration on which they have claimed input tax. This is a deemed self-supply when a person ceases to be VAT registered, to ensure that their future consumption of the assets (as a non-taxable person) is properly taxed.

If the business turnover increases again after de-registration the business may once again become a taxable person and have to register for VAT. If this occurs, and to the extent that the goods are still held and will be used in the new VAT registration, VAT on the deemed supply at de-registration can be considered when establishing an input tax claim.

As there will be no VAT invoice to support any such claim, HMRC's policy was that this precluded input tax deduction under the law. However the lack of any deduction offended neutrality (by precluding the possibility of effective input tax deduction on some of the cost components of taxed supplies). HMRC therefore allowed, by informal concession, claims for relief on goods on hand from persons who were previously registered for VAT under the same legal entity.

HMRC now consider that its discretion to allow alternative evidence can be applied to these claims and has therefore revised its policy in this area. HMRC will accept proof that payment of VAT on the deemed supply was made to HMRC on de-registration as alternative evidence in support of an input tax claim.

However a deduction will not be available if the goods were not intended for business use at the time of the deemed self-supply on de-registration. The most likely reason for this is that the business ceased altogether at this point.

If the asset is a capital item falling within the capital goods scheme (land or buildings costing over £250,000, computer equipment, ships or aircraft costing over £100,000), any input tax deduction must be under the capital goods scheme. The four year limit does not apply to these assets.

Brief 1/12 is available at:-http://www.hmrc.gov.uk/briefs/vat/brief0112.htm