VAT increase to 20% from 4 January 2011
17/12/2010
You should be aware that the standard rate of VAT increases to 20% from 4 January 2011, but what is less clear is how the VAT rules work where invoices are raised or payments are received around this date.
This is all down to the 'tax point'. The 'basic' tax point is when the supply of goods or services actually takes place, but the tax point is brought forward if an invoice is issued or payment is received before this date; or it is later if the invoice is issued within 14 days of the basic tax point.
Therefore, where a supply has its basic tax point before 4 January 2011 but the invoice is raised on or after 4 January 2011 (but within 14 days of the supply), the rate applicable will be 20%.
However, you can choose to apply the VAT rate at the basic tax point, 17.5%. This would be advantageous where your customer cannot recover part or all of the VAT.
Where invoices are raised or payment is received before 4 January 2011 for supplies made on or after that date, VAT can be charged at the lower rate of 17.5%, subject to the anti-forestalling rules discussed below.
If your supply spans 4 January 2011, HMRC will allow you to either charge VAT at the higher rate of 20% if the invoice is raised after 4 January, or if you wish, apportion the charge between the work done before 4 January and work done on or after that date and charge 17.5% and 20% respectively. As long as the apportionment is fair, HMRC will not object to this.
However, beware strict anti-forestalling provisions which impose a supplementary 2.5% VAT charge on you where invoices are issued, or payments are received before 4 January 2011 for supplies made on or after that date and one of the following conditions is met:
- You supply the goods or services directly or indirectly to a connected person.
- You provide or arrange funding of your customer's payment.
- You issue a VAT invoice to your customer that does not have to be paid in full within six months.
- The payment or VAT invoice is in excess of £100,000 (including other supplies made as part of the same scheme) where this is not commercial practice.
Importantly these rules will not affect you if your customer can recover VAT in full; this only affects supplies to partly exempt persons or those who are not in business or not wholly in business.
HMRC says these are likely to affect very few businesses. It has issued useful guidance on the anti-forestalling legislation and on how the change in rates affects VAT-registered businesses, available here:
http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-increase.htm
If you would like to discuss the changes further, please do not hesitate to contact us. |
