Once upon a time, there was a small business owner named Tom, who ran a modest but thriving furniture shop in the heart of his town. After years of hard work and steady growth, Tom’s turnover finally reached the VAT registration threshold. His accountant advised him that it was time to register for VAT.
Eager to comply, Tom filled out the necessary paperwork and officially became VAT-registered. While he was relieved to have that out of the way, something weighed on his mind. His accountant didn’t explain the full implications of VAT registration beyond the basics of charging VAT on sales and filing quarterly returns. And, like many small business owners, Tom assumed that was all there was to it.
Tom noticed something strange in the months following his registration. He had been diligently adding 20% VAT to his sales invoices and paying his quarterly VAT bills. However, his profits seemed to have taken a nosedive, and he couldn't quite figure out why.
He consulted his accountant, who reassured him that everything was normal, suggesting that his higher turnover might have pushed him into a tougher competition bracket. But deep down, Tom felt there was something else. His expenses were rising, especially after becoming VAT-registered, but he couldn’t figure out why it wasn’t balancing out. After all, he could now claim back VAT on his business expenses, right?
That’s when a fellow small business owner, Sarah, who also recently became VAT-registered, casually mentioned something in a conversation over coffee one day.
“You know, Tom,” Sarah began, “I just submitted a backdated claim for VAT on some office equipment I bought three years ago. It’s been such a relief—I got a nice refund from HMRC.”
Tom looked puzzled. “Backdated claim? I thought you could only claim VAT once you're registered?”
Sarah shook her head. “No, you can backdate your claim on goods you still have on hand for up to four years before you registered, and for services, you can claim for six months. My accountant explained it. You should check your stock records—you might be owed quite a bit of money!”
Tom's heart sank as he realised the magnitude of his oversight. All those high-value furniture materials he’d been sitting on for years—wood, fittings, and machinery—could have been claimed. And services too: marketing campaigns, consultancy, software subscriptions, all just months before he became VAT-registered. It could have been thousands in VAT claims that went unclaimed.
The truth hit Tom like a sledgehammer. For nearly two years, he had been absorbing the VAT cost on goods he already owned and services he had already paid for, simply because he didn’t know the rules.
That night, Tom pulled out his business records, calculating just how much VAT he could have claimed. The total came to almost £12,000—an amount that could have turned his recent losses into healthy profits.
Determined to fix things, Tom went to a new accountant, an expert in VAT for small businesses. After poring over Tom’s records, the new accountant helped Tom make a claim to HMRC for the backdated VAT he was entitled to. While it didn’t erase all the financial strain Tom had experienced, it provided a much-needed boost to his business.
But the lesson stuck with him: not knowing the rules can cost you dearly. If his first accountant had pointed out this critical VAT rule, his business might never have faced such a rocky period. Instead, Tom learned the hard way that when it comes to VAT, details matter.
The Takeaway for Small Business Owners
Tom’s experience is a cautionary tale for small business owners who register for VAT. Many people don't realise that they can claim back VAT on goods purchased up to four years before registration (as long as they are still on hand), and services provided up to six months before the VAT registration date. This rule can make a substantial difference to your bottom line, particularly for businesses with significant pre-registration stock or services.
When registering for VAT, ensure that your accountant goes through all the possible VAT reliefs you are entitled to. If they miss these details, you could be losing out on substantial sums, as Tom discovered.
Relevant Legislation & Rules
Tom’s story highlights a provision found in the VAT Regulations 1995, specifically regarding backdating VAT claims. HMRC allows businesses to reclaim VAT incurred on goods purchased up to four years before their registration date, as long as those goods are still in the business at the point of registration. Services, however, have a shorter window, with VAT reclaimable on services dating back six months before registration.
Please, refer to HMRC Notice 700/1 (VAT Notice: Should I be registered for VAT?), 5.2 VAT you paid before you registered.
While these provisions can seem straightforward, it’s crucial to have an accountant who understands the nuances. Missing out on these claims can significantly impact a business's cash flow, as Tom’s story demonstrates.
Make sure you consult a knowledgeable tax professional who can guide you through these complex VAT rules so you don’t leave money on the table.
Tom’s journey may have been full of financial hurdles, but it stands as a reminder for small business owners to be proactive in understanding their VAT entitlements—and to seek advice from accountants who pay attention to the details that matter.