VAT registration for pre-revenue life-science businesses

Pre-revenue life sciences businesses can register for VAT and recover eligible VAT on their spending before any income arrives, provided they can show HMRC a genuine intention to make taxable supplies in the future.

For companies investing heavily in research, clinical trials and regulatory approvals, that recovery protects cash flow at the stage when it matters most. Securing registration is the difficult part, and a poorly prepared application can delay the recovery or lose it altogether.

VAT adds a significant cost before revenue begins

Life sciences businesses invest heavily long before they generate revenue. Spending on research and development, clinical trials, regulatory approvals, specialist advisers and intellectual property create significant VAT costs, including VAT on goods imported to assist in trials.

Those costs land when protecting cash flow matters most. VAT registration gives the business the opportunity to recover eligible VAT during the pre-revenue phase, and the sooner it is registered, the sooner that recovery can begin.

Tanraj Basal, Senior VAT at Kreston Reeves points out:

“Life sciences companies spend heavily on research, trials and regulatory approvals long before revenue arrives, and the VAT on that spending adds up quickly. A well-evidenced VAT registration lets the business recover eligible VAT while it is still pre-revenue, which is why we encourage companies to start building their case as early as possible.”

HMRC needs proof of future taxable supplies

A pre-revenue business must prove its case to HMRC before it can register for VAT. HMRC wants evidence that the business genuinely intends to make taxable supplies in the future, and for an early-stage life sciences company, building that case takes work.

The route to commercialisation is long and complex. Revenue can come from licensing, milestone payments, contract research, intellectual property or product sales, and the commercial story changes as the business develops. A successful application presents that story clearly, demonstrates a credible taxable intention and is backed by a business plan that sets out how VAT will be managed.

What a well-prepared VAT registration case includes

A well-prepared VAT registration case gives HMRC a clear, credible account of how a pre-revenue business will move from investment to taxable revenue. For a life sciences business, the case brings together:

• an explanation of the commercial model and how it is expected to develop
• the revenue routes the business intends to pursue and how they lead to taxable revenue
• a business plan that incorporates thought about how VAT is to be managed
• an application that anticipates HMRC’s questions about a business with no sales yet

Taken together, these show HMRC that the intention to make taxable supplies is genuine and rests on a credible commercial plan.

Tim Creasey, VAT Senior Manager at Kreston Reeves comments:

“When a life sciences business has no sales, HMRC is registering it on the strength of its plans. The applications that go through smoothly set out clearly where taxable revenue will come from and show that VAT has been built into the business plan from the start.”

A weak application puts VAT recovery at risk

Without a well-prepared business plan and a carefully drafted application, HMRC can ask further questions, delay its decision or refuse registration. Any of these outcomes means valuable VAT recovery is delayed or lost, and management time is diverted from the core business. For a business with no revenue, neither is easy to absorb.

HMRC’s scrutiny continues after registration

Registration is only the first step. HMRC is likely to review the eligibility of a VAT registration, and the business’s entitlement to VAT recovery, at points after registration. A compliance approach that develops with the business keeps it ready for those reviews.

How we help

We help pre-revenue life sciences businesses build and present a compelling VAT registration case. Our VAT specialists take time to understand your commercial model, identify the points HMRC is likely to focus on and explain how your business intends to generate taxable revenue. We support you by:

• managing your VAT registration application
• helping demonstrate your taxable intention to HMRC
• dealing with HMRC questions during the registration process
• providing ongoing VAT returns, compliance and advisory support as your business grows
• helping manage HMRC reviews of your registration and VAT recovery

Act early to protect cash flow

Speak to us as early in your business venture as possible. The earlier we start, the more time there is to build a strong case before HMRC sees it. If your life sciences business is investing now but has not yet begun generating revenue, we can assess the VAT recovery opportunity, support your registration and set up the VAT compliance your business will need as it grows.

Frequently asked questions about VAT registration for pre-revenue life-science businesses