To what extent can a business make a claim to offset input VAT incurred on supplies which it received for the purpose of its business prior to being registered for VAT?
UK law, which restricts a non-registered trader from claiming input tax incurred prior to registration, is based on the EU Principal Directive (2006/112 EC).
The Schemepanel Trading Limited v Customs & Excise Commissioners  case concerned supplies made to a building contractor, in the form of staged supplies during which time the taxpayer became VAT registered.
The taxpayer claimed input tax on supplies made and used by it before VAT registration, based on it being unnecessary to be VAT registered at the time when supplies were used in order to reclaim input tax.
It was held, by reference to higher decisions including Customs & Excise Commissioners v Apple & Pear Development Council  and BLP Group plc v Customs & Excise Commissioners  that it is a basic principle of VAT that input tax can only be deducted in respect of supplies which are subject to output tax: they have to be “the cost components” of the supply on which output tax is charged.
This is based on the fundamental principle of VAT that input tax should only be claimed to the extent that it can be attributed to the making of taxable supplies, so supporting the principle of fiscal neutrality.
Regulation 111 of VAT Regulation SI 1995/2518, (the “VAT Regulations”) also reflect this principle but within certain limits allow that there can be a time lapse between the receipt of supplies and the making of supplies by a taxable person. But that regulation can have no application where goods have been bought and sold before registration.
In Earl Redway (t/a Loktonic) v Revenue & Customs (VAT – SUPPLY : Pre-registration)  Mr Redway’s on-line business was registered for VAT on 4 January 2014. Mr Redway claimed input VAT relating to goods bought before 4 January 2014. HMRC allowed a percentage of that claim on the basis that some of those goods had been bought but not sold prior to 4 January 2014 and so could be treated as “stock in hand” at the time of registration. Input tax for such “stock in hand” could be re-claimed under Regulation 111 of the VAT Regulations. However they refused any input tax re-claim for goods which had been bought and sold before registration.
The supplies for which he was claiming input tax had not been used to make taxable supplies, they had been used to make supplies while Mr Redway was treated as exempt from VAT prior to registration.
The goods to which the disputed input VAT related had been both bought and sold before Mr Redway’s VAT registration for VAT. None of them could be treated as “stock in hand” at the date of the VAT registration.
Those supplies did not form part of any kind of taxable supply made by Mr Redway so the exceptional time limits in Regulation 111 did not apply.
So the input tax could not be re-claimed. For these reasons HMRC’s refusal to repay input VAT was confirmed.
This blog has been posted out of general interest. It does not replace the need to get bespoke legal advice in individual cases.