It is a common situation for a business to be set up but not to trade for some time. For example, where a new property development company is set up and seeking an appropriate property to purchase, or where a subsidiary is formed to deal with a new line of business and they are still getting in orders. Many businesses incur significant amounts of input tax on start-up costs (preparatory costs such as renovation of buildings, research, feasibility studies, etc.) before they make any taxable supplies. If such a business waits until it starts to make taxable supplies before it reclaims the VAT, it can be lost because of the three-year cap on the recovery of pre-registration input tax.
There is good news, a business can register before making taxable supplies as an ‘intending trader’. 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 to support an application for voluntary registration can include (Notice 700/1/2002, para. 2.4):
- 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; and
- a statement with an option to tax certain land or buildings.
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. There is no need for an intending trader either to state a date by which he intends to make taxable supplies or to estimate the value of his 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. However, VAT may have to be repaid to HMRC if the purchases have been used for some exempt purpose 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 would be an exempt supply.
Where a business satisfies HMRC that it intends to make taxable supplies in the future, HMRC must register him from the date of the application or such earlier date as may be agreed. Intending registration by property owners and developers can be more difficult. In 1990, HMRC relaxed the rules, but 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 property business. If you were still looking for a property this would be difficult as you had no property to opt!
Following the VAT Tribunal decision in Beaverbank Properties in 2004, HMRC had to back down and accept that a taxpayer can have an intention to make taxable supplies before an option is in place, even though the taxable supplies cannot occur until after the option is made. However, clear documentary proof of a taxable intention is required. Suitable evidence includes documents to and from third parties showing a firm commitment to make taxable supplies. The intending trader rules are useful to new businesses, as VAT costs can be recovered as and when they are incurred. These are welcome funds at a time when there is no trading income coming in.