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Prepare for the VAT rate rise

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2 November 2009

The standard rate of VAT reverts back to 17.5% from 1 January 2010.

The below frequently asked questions provide much of the information you will require to ensure a smooth transition. If you require further guidance please contact Julian Millinchamp on 01242 237661 or julian.millinchamp@hazlewoods.co.uk


What is changing?
From 1 January 2010 the standard rate of VAT reverts back from 15% to 17.5%.


How will this affect me and my business?
Generally you will need to follow the normal tax point rules to decide what VAT rate you should charge.


What are the normal tax point rules?
If the invoice or payment is made before 1 January 2010 the rate of VAT will be 15%. If after, the rate of VAT will be 17.5%.


Are there circumstances where the normal tax point rules are not simple
?
Complications can arise where various tax points span the date of the change. These are detailed below, split between supplies of good and supplies of services. There is also anti-forestalling legislation to stop deliberate avoidance.   


How does this affect supplies of goods?
For a supply of goods, there is a “basic” tax point at the time that the goods are delivered to/collected by, or are in some way “made available” to, the customer. However this basic tax point will, in normal circumstances, be overridden by an “actual” tax point, which will be:
  • the date of payment (where the customer makes payment in advance); or
  • the invoice date (where the supplier issues a tax invoice either before, or within 14 days after, the basic tax point).
    But where the basic and actual tax points occur on either side of 1 January 2010, the supplier can elect (on a transaction by transaction basis) to determine the VAT liability by reference to the basic tax point, if this produces a VAT charge @ 15%, rather than 17.5%, for the customer.  

How does this affect supplies of services?

For a supply of services, in general the same tax point rules as above apply (with a basic tax point being created on completion of the service). The same election as above is available where the tax points span 1 January 2010. However a further concession exists where both the basic tax point and actual tax point occur after 1 January 2010, but the relevant work began before that date. The supplier may choose to adopt the normal rules and simply charge the 17.5% rate on the entire invoice value, or can instead charge output VAT at the 15% rate on that part of the work completed before 1 January 2010, and at the 17.5% rate on the part completed after the rate change. Private customers who are aware of this are sure to request this treatment!! – however a condition of using this approach is that the apportionment can be justified on the basis of measurable work, so detailed records are essential.


What happens if I act for a client on an ongoing basis?

Where you are acting for a client on an ongoing basis under an open-ended contract, it is likely that you will be regarded as providing “continuous services”. Accountancy services are a good example. There is no “basic” tax point in this situation, only an actual tax point which is most likely to be created by the raising of a tax invoice. The issue here will arise when an invoice is raised after 1 January 2010 to a non VAT-registered customer for a period which spans the change in VAT rate. The obliging customer will have paid in advance to create a tax point at the 15% rate, however more likely is that the customer will request that the apportionment procedure should be applied to the invoice as described in the previous answer.


What if I am open for trading at midnight on New Year’s Eve?

Pubs, clubs, restaurants and other retail businesses open past midnight on New Year’s Eve will be allowed to charge VAT @ 15% on sales until they close, or until 6am on 1 January, whichever is the earlier. Similar arrangements apply to telecommunications provided in respect of call and texts made up to 6am on 1 January.


What is the anti-forestalling legislation?

These rules are not likely to affect many businesses, but may affect you where the supply of goods or services is made on or after 1 January 2010, your customer cannot recover VAT on the transaction in full, and the following circumstances apply:
  • A connected person pre-pays you for future supplies;
  • You issue a VAT invoice to a connected person for future supplies;
  • You facilitate funding for a customer enabling them to pay in advance for goods or services you provide;
  • You issue a VAT invoice that does not require payment for at least six months
  • You issue advance VAT invoices or receive a prepayment for more than £100,000 when this is not normal practice for you; or
  • You receive payment prior to 1 January 2010 for a supply after this date.

Further information can be found at http://www.hmrc.gov.uk/vat/forms-rates/rates/anti-forestall-guidance.pdf


What about the flat rate scheme?...
On 1 January 2010, the flat rates will broadly return to their November 2008 levels. However HMRC will be reviewing the rates and some adjustments may be made. The flat rates will be finalised and published towards the end of 2009.


…and fuel scale charges?
New rates effective from 1 January 2010 can be found at the end of the document:
http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf


Where can I get further information?
HMRC have produced a guide which can be obtained from their website –
http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-changes.htm

You can contact Julian Millinchamp on 01242 237661 or 
julian.millinchamp@hazlewoods.co.uk