VAT & Pre-registration Recovery
The Aspire in the Community VAT case is a recent and important decision for UK businesses navigating VAT recovery when moving from making exempt supplies to a mix of exempt and taxable supplies after VAT registration. Here’s what happened and why it matters.
Aspire in the Community Services Limited (ACSL) and its group company initially provided only exempt welfare services, meaning they couldn’t recover VAT on their costs. After registering for VAT, they began making some taxable supplies, which opened the door to partial VAT recovery. The key issue was whether ACSL could reclaim VAT on goods and services bought before registration, so-called “pre-registration VAT”, and if so how much.
HMRC allowed some recovery but argued that because the business was making only exempt supplies before registration, the recoverable VAT should be reduced to reflect this pre-registration use. They applied a method that depreciated the value of goods to account for their use before registration, allowing only a portion of the VAT to be reclaimed.
ACSL disagreed, arguing that once HMRC exercised its discretion to allow pre-registration VAT to be treated as input tax, the normal partial exemption rules should apply. In other words, the apportionment should be based on how the goods and services are used after registration, not before.
The Tribunal sided with ACSL. It clarified that HMRC’s discretion under the VAT Regulations is limited to authorising pre-registration VAT to be treated as input tax. Once that’s done, the statutory rules for input tax deduction and partial exemption take over. The Tribunal found that the correct approach is to look at the use of goods and services after registration - if they’re used to make taxable supplies and haven’t been consumed before registration, the VAT can be recovered in line with the business’s partial exemption recovery rate.
The Tribunal rejected HMRC’s method of depreciating goods for pre-registration use, noting there’s no legal basis for this. The law requires that apportionment is based on post-registration use only.
For businesses, this case is significant. It means that if you register for VAT after making exempt supplies, you can recover pre-registration VAT on goods and services (subject to the usual time limits and provided they’re still in use), and the recovery should be based on how you use them after registration - not how you used them before. This provides clarity and potentially greater VAT recovery for businesses transitioning to partial exemption.
