Andrew Needham looks at why and how to register for VAT before a business starts to trade.
It is quite common for a business to be set up and incur (sometimes considerable) costs long before it actually starts to make any sales. For example, an internet company starts up and spends large sums on developing a website and purchasing capital equipment and stock but may not be able to trade for many months while development and trials take place.
Even more common would be a building development company that has to purchase land and materials and then construct the property while incurring large VAT costs but may not be able to sell any properties for as long as a year after starting to incur costs.
The input tax incurred in these circumstances can be large and if it cannot be recovered in a timely manner can severely impact the cashflow of the business.
‘Intending trader’ registration
There is good news for businesses in these positions. HMRC are aware of these problems and have made provision for businesses in these circumstances to register for VAT before they start to trade as ‘intending traders’.
Once a business starts to incur costs it can apply for VAT registration even though it may not make taxable supplies for some time. However, HMRC will wish to be satisfied that a person intends to trade in the future and is setting up a bona fide business.
Evidence of intended trade
Evidence to support an application for voluntary registration can include:
- details of the arrangements made;
- copies of contracts in the pipeline;
- planning permission;
- details of what has been bought for the business;
- details of any patents sought; or
-
an application to opt to tax land or buildings.
There is no need for an intending trader either to state a date by which it intends to make taxable supplies or to estimate the value of its supplies. Apparently, there is no time limit between the effective date of registration of an intending trader and the date when the first taxable supply is made. The period could be years. For example, forestry planters can be registered as an intending trader although their first taxable supply may not be made for many years.
'Pros’ and ‘cons’
The intention to make taxable supplies confers a right of registration, and consequent input tax recovery. If the activity proves abortive, the business can normally retain the VAT validly recovered under the intending trader registration.
However, VAT may have to be repaid to HMRC if the purchases have been used for making exempt supplies before any taxable use occurs. For example, a developer buys some land, pays and reclaims VAT on the purchase with the intention of building and selling a commercial property, but then decides not to go through with the project and sells the land to a housing association, which is an exempt supply. It would then have to repay all the VAT claimed.
Problems for commercial developers
Intending registration by property owners and developers can be more difficult. In 1990, HMRC relaxed the rules, but have gradually made it more difficult to register as an intending trader, insisting that an option to tax had to be exercised before they would register a commercial property business. If a business was still looking for a property this would be difficult as it had no property to opt even though it was incurring costs on professional fees!
If this happens, make a ‘real estate’ option that covers all present and future commercial properties acquired.
Practical tip
If a business is going to incur input tax before it starts to trade, it can still register for VAT as an ‘intending trader’ but will have to show to HMRC that it has a genuine business.
