Recovery of pre-registration input VAT: fee-paying schools

In the recent case of Aspire in the Community Services Ltd v HMRC, the tribunal decision has challenged several key aspects of HMRC’s long standing policy on the recovery of VAT on pre-registration costs – particularly relevant to fee‑paying schools that were making exempt supplies before they were required to register for VAT.

Historically, HMRC have long held the view that the recovery of VAT on pre-registration costs is a matter over which they have significant discretion. For costs which fall outside the Capital Goods Scheme, HMRC’s guidance indicates that it can restrict claims for various reasons, including the extent to which goods or services are used, or consumed prior to registration, or in the case of goods on hand at the date of registration, the expected economic life of those items.

The tribunal concluded that the scope of HMRC’s discretion in these matters is far more limited than their guidance suggests. As a result, schools who registered following the change in the VAT treatment of education, may be able to recover additional amounts of VAT on:

• goods purchased up to four years before VAT registration, and
• services purchased in the six months before registration.

Many schools will have included claims for pre-registration VAT recovery on their first VAT returns, and it seems that many of these claims have been limited to reflect HMRC’s current guidance, which the Tribunal concluded was wrong in law, or have been reduced by HMRC as part of a review of initial VAT returns – again based on HMRC’s current incorrect guidance.

This judgment provides opportunity for schools who have limited claims for pre-registration input tax or have seen claims reduced to by HMRC to revisit their position. Schools who have yet to make such claims should also review their position.

If you would like to discuss your position in more detail, our specialist VAT team would be pleased to discuss the implications of this ruling and potential opportunities. Contact us for a no‑obligation chat.