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13th February 2019

VAT efficient start-ups

Do you know what it takes to be a VAT efficient start-up?

You’ve set up a company to run a business venture.

It’s risky and may come to nothing.

In the meantime, the company is incurring significant costs.

Can you recover the VAT, and if so when?

To be a VAT efficient start-up you need to know the answers.

VAT efficient start-up

The set-up period and associated costs will vary depending on the type of business you’re starting. These costs are painful while there’s no income being generated. One way to reduce the start-up expenses is to recover the VAT you paid on them.

You’ll need to be VAT registered for this.

You’re entitled to register even before you’re ready to start selling goods or services. As long as there is economic activity, such as purchasing goods or services for future trading, you are “in business” which means you can register voluntarily. HMRC calls this an intending trader registration.

Once registered as an intending trader you must submit returns in the same way as active businesses. This allows you to claim a refund of VAT paid on set-up purchases.

If for any reason your business never starts trading HMRC can’t claw back any of the VAT you’ve reclaimed. For this reason it’s far better to register as an intending trader and recover VAT upfront rather than leave registration until trade begins as you could lose your chance to reclaim some or all of it.

This is how to be a VAT efficient start-up.

Although spending money on business preparation costs gives you the right to register, the general rules only allow you to reclaim VAT on purchases if they’ll be use to make VATable supplies. Being registered alone isn’t enough to allow you to reclaim VAT.

HMRC will ask for evidence to show you have a genuine intention to make taxable supplies before it will register you. It requires more evidence if your intended trade is property development.

In theory, there’s no time limit on how long you can remain registered as an intending trader. But it is usually less than 3 years and depends upon the type of business.
Remember, it’s the intention to trade that gives you the right to register, not the feasibility of its success.

If HMRC refuses to register you as an intending trader, you can either appeal against its decision, or you can reapply when it’s clearer that the business is getting off the ground.
A company can’t be VAT registered before the date of incorporation. However, it’s usually possible for those who will be directors to personally register as intending traders before incorporation.

Need help setting up a VAT efficient start-up? Get in touch and we can give you advice.

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