If, on the day your business goes VAT-registered, it holds any fixed assets, goods for resale or materials that will be used in future production and if these were bought within the previous four years, then it can reclaim the VAT on them on its first VAT return. The ability to do this can often lead to a significant repayment of VAT once the first VAT return is filed. The thinking behind this is that the assets, goods or materials bought pre-registration are going to be used to generate sales (post-registration) on which VAT will be charged (and therefore payable to HMRC), so it’s only fair to allow the business to reclaim the VAT on the cost already incurred.
You’re also allowed to reclaim VAT suffered on services supplied to your business in the six months prior to the date of VAT registration. It’s difficult, in practice, to say whether services used (for example, rent, utilities and phone bills) prior to registration resulted in post-registration (and therefore VAT-able) sales, so this is why there’s a restriction to just six months.
There’s one really interesting anomaly that’s worth noting – especially if you’re not currently VAT registered but think that you may be in the future. Software downloaded is classed as a service, so you’d have to have an invoice dated within six months of VAT registration to reclaim the VAT. But software supplied on a disk is classed as goods – so you could reclaim VAT on anything bought this way in the previous four years (assuming it’s still used in your business).