Claim VAT back on purchases made before you were VAT-registered

This article explains how to reclaim VAT on goods purchased within the last four years and services purchased within the last six months.

HMRC allows newly VAT-registered businesses to reclaim VAT on certain recent purchases. This includes goods, such as stock and assets, that your business purchased within the last four years, or services purchased within the last six months.

Initial VAT settings

To set your business up for VAT in FreeAgent, you’ll need to complete your initial VAT settings. 

During this process, you’ll be asked to select ‘Include pre-registration expenses from’

If you select 'Don’t include them', FreeAgent won’t pull through any pre-registration purchases.

If you select 'From the last 6 months', FreeAgent will pull through all purchases with VAT from the prior six months.

If you select 'From the last 4 years', FreeAgent will pull through all purchases with VAT from the prior four years. FreeAgent won't know which purchases are potentially goods and which are services, so please make sure that you do not include services dated from more than six months ago unless your accountant advises you differently.

How pre-registration expenses are displayed on the VAT full report

Pre-registration expenses will show on the VAT full report dated the first day of the open VAT return, i.e the date of VAT registration. It's important to note that this doesn’t change the date of the original transaction, and if you select any pre-registration costs in the full report then it is possible to see the original transaction date. These items are all displayed at the top of the report so they’re easier to identify. This is also how FreeAgent will display any VAT corrections or deferrals.

Which option should I choose?

The default selection is six months. If you leave the selection on six months, then the only transactions you’ll need to exclude from your first VAT return are purchases of goods you no longer have, and purchases you don’t have the required documentation for.  

If you have purchases that were made longer than six months prior to your VAT registration and you’re eligible to reclaim them, then you should select four years. However, remember to exclude transactions that you aren’t allowed to claim back, such as services dated more than six months ago.

How can I exclude transactions?

To exclude all your pre-VAT registration purchases, select  ‘Don’t include them’ from the drop-down, but if you need to exclude transactions individually, you can change the VAT on each transaction to 'Out of Scope'. This ensures the transaction won’t appear on your VAT return.

But how do I tell FreeAgent which transactions to look at?

FreeAgent looks at bills, bank payments and expenses when it's looking for pre-registration input VAT. We'll use the example of bills.

Simply enter the bills as you normally would.

Enter them with the correct date, the date that's on the bill, just as normal, because FreeAgent will look back. Make sure that the bill date is after your company start date - because your business couldn't have bills issued to it before it existed.

What if I'm not entitled to claim input VAT on this bill?

You need to make sure you claim the input VAT on the right transactions. If you are entitled to claim pre-registration VAT on a particular bill, add the bill with VAT on it.

But if you're not entitled to claim pre-registration VAT, choose 'Out of Scope' from the 'VAT Rate' drop-down menu when entering the details for the bill so that FreeAgent does not reclaim this on your VAT return.