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For information of users:
This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.
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VAT Increase
The standard rate of VAT is set to increase from 15% to 17.5% on 1st January 2010. The new rate must be applied to all supplies of standard-rated goods and services from this date. However, there are VAT saving opportunities available, so please read on.
Advance invoicing and payment
The 15% rate can be applied if your business is paid early or you invoice by 31st December 2009, even if this is in advance of your customer receiving the goods or services. This will benefit your customers who cannot reclaim the VAT whilst giving your business a possible cash-flow boost, as you can encourage your customers to pay earlier.
Let us suppose you run a furniture shop and take an order for a sofa costing £1,500 on 21st December 2009 and receive a £100 deposit. The sofa will be delivered on 25th January 2010.
The deposit will include 15% VAT. If the balance of £1,400 is paid after 31st December 2009, this will include 17.5% VAT.
If you encourage your customer to pay early, you will be able to pass on the 2.5% VAT saving so that the total price payable is reduced to £1,474.10.
Goods delivered or services provided by 31st December 2009
If you deliver goods or provide services by 31st December 2009, invoices raised from 1st January 2010 can still benefit from the 15% rate.
Continuous supply of services
If you provide continuous services to clients as a solicitor or other professional, VAT is due when an invoice is raised or payment received, whichever happens first. If, for example, you are to raise an invoice for work carried out in the three months to 31st January 2010, you can just charge 17.5% VAT on the full amount based on the date of the invoice. This keeps things simple.
However, suppose your client cannot reclaim the VAT as he is not VAT registered. In this scenario, a concession exists that allows you to charge only 15% VAT on a measured amount of work that you have carried out up to 31st December 2009. The work after this date is subject to 17.5% VAT.
Work in progress – self contained job
Let us suppose you are an electrician who starts a big rewiring job on 15th December 2009 but does not finish it until 15th January 2010. You have the following options:
- Invoice after completing the work and add 17.5% VAT. The 2.5% VAT increase will be effectively passed on to your customer if he cannot reclaim the VAT;
- Encourage your customer to pay for the job in full by 31st December 2009. He can then benefit from a 2.5% VAT saving;
- Invoice in advance by 31st December 2009, adding only 15% VAT;
- Invoice after completing the work, but apply the 15% rate to part of the invoice which represents work carried out by 31st December 2009. The remainder will be subject to 17.5% VAT.
Cash Accounting Scheme
If you use the cash accounting scheme, the amount of VAT accountable on the receipt is equal to the amount of VAT shown on your sales invoice, following the principles described above. In other words, cash accounting only affects the time the VAT charged is put on your VAT return. It therefore has no bearing on what rate of VAT should apply.
For example, VAT is only due at 15% on receipts in respect of invoices raised before 1st January 2010. The same is true where goods have been delivered by 31st December 2009 and the invoice has been raised in January 2010, etc.
Flat Rate Scheme
If you use this scheme, the flat rate percentages will increase on 1st January 2010. However, you should apply the lower rate to the extent that you have charged 15% on your sales invoice, following the principles described above.
Taking the electrician example above, if the job is half finished on 31st December 2009 and the whole job is invoiced in January 2010, you can charge your customer 15% VAT on half of the value of the work. The pre 1st January 2010 flat rate percentage can be applied to half of your gross (VAT inclusive) invoice when working out how much to enter on your VAT return.
Credit Notes
Any credit note must be based on the same rate of VAT charged on the original sale. Thus you are not permitted to raise a credit note after 31st December 2009 including 17.5% VAT when the sales invoice included 15% VAT.
Rules to counter substantial abuse
The Taxman has a power to levy a 2.5% supplementary VAT charge, where the amount of VAT saved by following the above advice is significant.
This will not apply where your customer is able to fully reclaim the VAT you have charged as there is no loss of tax revenue overall. If this is not the case, there will still be no problem unless one of the following applies:
- The sale value (and of any related sales) is more than £100,000 (excluding VAT);
- You are connected to your customer (e.g. spouse, child, etc.);
- In the case of an advance invoice (but not an advance payment), payment is due more than six months after the invoice is issued;
- You are financing any advance payment.
The above rules do not apply if your sale involves letting, hiring, or renting assets and the advance invoice or payment is 'normal commercial practice'. If you require any further information, please contact us.
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