The VAT rate increases to 20% with effect from 4th January 2011. HMRC
have produced an excellent guide to the change, available on their website
–
http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-increase.htm
This includes a link to the new thresholds for the Flat Rate Scheme
[FRS] -
http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5a
Basically, the normal tax point rules will apply: date of invoice or
date of payment,
whichever comes first. So if the invoice or payment is made before 4th
January, VAT will be at the rate of 17.5%; anything after that date
will be at 20%. Customs have issued some anti-forestalling legislation
to stop blatant avoidance, and these are summarised later, but first
the basic rules:
Basic rules
1. Retailers should start accounting for VAT at 20% with effect from
4th January, using the VAT fraction 1/6th (i.e. the VAT element of the
retail price paid by the customer is 20/120). If the customer has an
account and he takes the goods away prior to the change, then you account
for VAT at 17.5% (the current VAT fraction being 7/47ths).
2. For all other businesses issuing VAT invoices after 4th January,
they should be at
20%, unless the goods/services were supplied before the rate change.
You can then
choose to charge at 17.5%.
For supplies of services that span the change, then you can charge 17.5%
for those
services provided before the change, 20% afterwards OR charge all at
20%
Suppliers issuing invoices prior to the rate change, but where delivery
will take place
after the 4th January, may charge VAT 20%
These rules are optional and you do not need to notify HMRC.
3. Businesses issuing quotes and estimates for work to commence after
4th January
should quote the 20% rate. Customers willing to pay before that date
can be charged at 17.5%, subject to the anti-forestalling legislation.
4. For Refunds or credit notes the business should apply the same rate
as originally
declared or invoiced i.e. if the adjustment is made after 4th January
and it relates to a sale declared at 17.5%, then the adjustment is at
17.5%.
5. Invoices issued for 12 months in advance, with monthly payments
plus VAT must
show VAT at 17.5% for all monthly payments up to 31st December 2009.
All
payments after that date must be at 20%
6. Sales of tickets to events (theatre, cinema, football season tickets)
before 4th January 2011 will attract VAT at 17.5%, even if the event
takes place after the rate change. The tax point is the receipt of payment.
REMEMBER
The increase in VAT will lead to changes to the Flat Rate Scheme percentages
and to the Fuel Scale Charges - all effective from 4th January 2011.
Those people whose VAT returns span the change will have to carry out
two separate calculations and will therefore need to be aware of the
rates in the middle and right hand columns of the table.
We have also included the previous FRS percentages which were in place
until 31st
December 2009 because we are aware that HMRC have been targeting FRS
businesses to ensure that there has been accurate implementation of
the previous changeover which came into effect on 1st January 2010.
Anti-forestalling legislation
As mentioned earlier, the normal tax point rules take precedence. If
the supply of goods or services is made before 4th January, OR payment
is received before that date, then VAT is due at 17.5%. 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
the 4th January 2011. These are:
You receive pre-payments from persons connected to you for future supplies;
OR
You issue advance VAT invoices to persons connected to you for future
supplies; OR
You provide or arrange funding to your customers to enable them to pay
in advance for goods or services to be supplied by you; OR
You issue VAT invoices that do not have to be paid for at least six
months; OR
You receive pre-payments or issue advance VAT invoices in excess of
£100,000, and this is not your normal commercial practice; OR
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 are only invoked if your customer cannot recover the VAT
charged in
full. Details and further explanatory notes are available on HMRC’s
website under
“Anti-Forestalling Legislation”
Example
You sell a car for £20,000, but delivery is after the rate change.
If the invoice is dated 31st December 2010 and the customer pays within
6 months, then VAT is due at 17.5%. Of course if he actually pays in
full for the car before the 4th January 2011, VAT of 17.5% is payable,
irrespective of delivery or invoice date.
The anti-forestalling legislation kicks in if the car is sold to the
dealer’s wife or family, or if payment does not have to be made
until July 2011.