VAT RATE RETURNS TO 17.5%

The VAT rate reverts back to 17.5% on 1 January 2010.  The normal tax point rules will apply for the change; the earlier of the date of invoice or the date of supply.  However there are some special anti-forestalling rules to prevent avoidance.

Basic rules

1. Retailers should account for VAT at 17.5% with effect from 1 January, using the VAT fraction 7/47ths.  Those who reduced their prices (2.13% was the actual reduction) should increase them by the same figure.  If the customer has an account and he takes the goods away prior to the change, then you account for VAT at 15%.

2. For supplies of services that span the change, then you can charge 15% for those services provided before the change, 17.5% afterwards or charge all at 17.5%.
   
   Suppliers issuing invoices prior to the rate change, but where delivery will take place after 1 January may charge VAT 17.5%.

   For all other businesses, VAT invoices after 1 January should be at 17.5%, unless the goods/services were supplied before the rate change.  You can then choose to charge at 15%.

3. Businesses issuing quotes and estimates for work to commence after 1 January should quote the 17.5% rate.  Customers willing to pay before that date can be charged at 15%, subject to the anti-forestalling rules.

4. Refunds or credit notes should be dealt with at the same rate originally declared or invoiced i.e. if the adjustment is made after 1 January and it relates to a sale declared at 15%, then the adjustment is at 15%.

5. Invoices issued for 12 months in advance, with monthly payments plus VAT must show VAT at 15% for all monthly payments up to 31 December 2009.  All payments after that date must be at 17.5%.

6. Sales of tickets to events (e.g. theatre) before 1 January 2010 will attract VAT at 15%, even if the event takes place after the rate change in 2010.  The tax point is the receipt of payment.

The increase in VAT will lead to changes to the Flat Rate Scheme percentages and to the Fuel Scale Charges – all effective from 1 January 2010.  These details have not yet been issued and will not necessarily be the same as they were before 30 November 2008.  Businesses whose VAT Returns span the change will have to carry out two separate calculations.

Anti-forestalling

The normal tax point rules tax precedence. If the supply of goods or services is made before 1 January, or payment is received before that date, then VAT is due at 15%.  However, there are some anti avoidance rules which affect only certain transactions where the actual supply of the goods or services is made on or after 1 January 2010. These are where any of the following apply:-

• You receive pre-payments from persons connected to you for future supplies;
• You issue advance VAT invoices to persons connected to you for future supplies;
  
• You provide or arrange funding to your customers to enable them to pay in advance for goods or services to be supplied by you;
• You issue VAT invoices that do not have to be paid for at least six months;
• You receive pre-payments or issue advance VAT invoices in excess of £100,000, and this is not your normal commercial practice;
• You supply rights or options to receive goods and services from you free of charge or at a discount i.e. receive payment prior to the rate change for a supply to take place after.

These rules will not affect many businesses and they are only invoked if your customer cannot recover the VAT charged in full.  Details and further explanatory notes are available on H M Revenue & Custom’s website under “Anti-Forestalling Legislation”.

Example

A dealer sells a car for £20,000, but delivery is after the rate change.  If the invoice is dated 31 December 2009 and the customer pays within 6 months, then VAT is due at 15%.  Of course if he actually pays in full for the car before 1 January, VAT of 15% is payable, irrespective of delivery or invoice date.

The anti-forestalling legislation would apply if the car is sold to the dealer’s wife or family, or if payment does not have to be made until July 2010.

These notes do not cover all circumstances. Please get in touch with your usual contact at the firm if you have a specific question about how these changes will be implemented.