Recovering VAT on speculative expenditure
You’re thinking of branching out into a new trade to complement the existing one. You’ve incurred costs on research and feasibility but if you decide not to go ahead are you entitled to recover the VAT paid on these?
Recovering VAT
As a registered business you’re entitled to reclaim (recover) VAT paid on purchases subject, of course, to a raft of HMRC rules and regulations One of the fundamentals is that you can only recover VAT paid where the goods or services purchased have a “direct and immediate” link to VATable supplies that make you. HMRC makes this point several times in its various VAT guides.
Direct and immediate links
In places HMRC’s guidance can be misleading, especially if read in isolation. The “direct and immediate” condition for VAT recovery mainly relates to distinguishing between VAT incurred on purchases made for business purposes and those for non-business purposes. For example, VAT can’t be recovered where a business purchases goods which are used in making VAT-exempt sales (because they aren’t VATable). That said, the “direct and immediate” rule seems to preclude the recovery of VAT for speculative purchases that may or may not lead to making VATable supplies at an unspecified future in time. Tip. HMRC’s interpretation has been challenged. In several important rulings the courts have decided in favour of the taxpayers and criticized HMRC’s interpretation as being too strict.
What is input tax?
The good news is that the main VAT legislation comes to the rescue of businesses who incur speculative costs for an existing or new business. It says that input tax (which can be reclaimed subject to the usual conditions) includes VAT paid or payable on any goods or services “used or to be used for the purpose of any business carried on or to be carried on by him”. In plain English this means:
An existing business can recover VAT paid on expenses it plans to use for its current trade; and VAT paid on expenses for a trade it has not yet commenced.
Tip. The legislation also means that if you haven’t started your business but are incurring costs, you can register as an “intending trader” and reclaim VAT on your paid purchases (as always, subject to the usual rules). This can allow you to not recover VAT on costs which you would not be entitled to under the pre-registration rules for VAT input tax.
Usual rules apply
Before recovering VAT for speculative business expenditure you must make sure the other usual conditions are met:
The supply that may result from the expenditure must be VATable. If it’s exempt then you can’t recover the VAT. If it will be a mix of exempt and VATable supplies, or supplies for non-business purposes, you must make a reasonable estimate of the value of VATable supplies and claim a corresponding proportion of the VAT
You must have evidence to show that your business has paid the VAT, e.g. invoices.
You’re entitled to recover the VAT paid by your business on speculative expenditure as long as the supplies you intend to make as a result of VATable, i.e. not exempt or for private purposes. This rule applies even if the project the expenditure relates to doesn’t come to fruition.