A win for VAT recovery: HMRC challenged over pre registration input VAT

The decision in Aspire in the Community Services Limited v HMRC [2026] TC09789 is an important and practical case on how businesses can recover UK VAT incurred before a VAT registration is in place, particularly where both taxable and exempt activities are involved.

Background

At its core, the dispute reflects a common scenario where a business incurs UK VAT prior to VAT registration, later registers (or joins a VAT group), and then seeks to recover that historic VAT.

Aspire in the Community Services Limited provided care services, many of which were VAT exempt. As the organisation developed, it incurred significant VAT on costs, such as overheads, professional services, and other expenditures before becoming VAT registered through joining a VAT group.

Once registered, Aspire sought to recover this earlier VAT under Regulation 111. This provision allows businesses to claim VAT incurred prior to the registration, subject to certain conditions and time limits, by treating it as input VAT in their first VAT return.

Aspire made both taxable and VAT exempt supplies in the UK. As a result, Aspire could not recover all of the VAT in full.  Instead, Aspire used a partial exemption method to calculate how much of the business’s costs relate to taxable activities, where VAT can be recovered.

Aspire used a use-based method, which looks at how costs are actually used across the business. This resulted in a recovery rate of around 77%, which HMRC broadly accepted as a reasonable method of calculation.

The dispute later arose because HMRC argued that not all of the pre-registration VAT should be included in that calculation.  HMRC’s view was that, before the VAT registration, Aspire had used those goods and services to make exempt supplies.

Therefore, HMRC said, part of the VAT had effectively already been consumed in exempt activities and should not be recoverable in full. To reflect this, HMRC attempted to reduce the claim using a depreciation-style approach.

Tribunal’s decision

The First Tier Tribunal (FTT) disagreed with HMRC and found in favour of Aspire.

A key point in the judgment was the role of Regulation 111. The Tribunal confirmed that this regulation functions as a gateway. It allows pre-registration VAT to be brought into the VAT system and treated as input VAT. However, it does not determine how much of that VAT can be recovered.

Once the VAT is treated as input VAT, the normal recovery rules apply. For a partially exempt business, this means applying a partial exemption method, in this case, the agreed use-based approach.

The Tribunal rejected HMRC’s argument that pre-registration use should reduce recovery. It held that there is no legal basis for considering how goods or services were used before registration. Instead, the relevant question is how those costs are used, or intended to be used, once they fall within the VAT system.

The Tribunal also dismissed HMRC’s attempt to apply a depreciation style adjustment. It found no legal basis for spreading VAT recovery over time by reference to a notional useful economic life.

However, the Tribunal made an important clarification, only VAT on goods and services that were not fully consumed before registration, and which have an ongoing use in the business, can be recovered. Costs that were fully used up before registration are not recoverable.

Accordingly, Aspire was entitled to include the full amount of eligible pre-registration VAT in its partial exemption calculation and recover it at the agreed rate.

Conclusion

The tribunal’s decision provides clarity for businesses that incur VAT before registering, especially those operating in sectors like healthcare, education, or financial services where exempt supplies are common.

The key takeaway is that, where pre-registration VAT qualifies under Regulation 111, it should be treated like any other input tax. Businesses can apply their usual VAT recovery method without reducing claims for pre-registration use, provided the costs were not fully consumed before registration.

It also gives reassurance that HMRC cannot introduce additional restrictions, such as depreciation-style adjustments, unless they are clearly set out in the legislation.