On 4 January 2011, the standard rate of VAT will increase to 20%. This change will affect any VAT registered business that sells or purchases goods or services that are subject to the standard rate of VAT.
This guide is intended for general reference only. If you have any specific queries that you feel are not covered, or if you would like more detailed information. Please contact Ronnie Brown or Carol Goodwin, who will be delighted to discuss your situation with you.
1. When do I have to start charging the 20% rate?
You will have to charge the 20% rate on sales of standard rated goods and services you make on or after 4 January 2011.
If you are a retail business making mainly cash sales to non-business customers (e.g. a shop, restaurant, hairdresser) and do not have to raise VAT invoices, you should use the 20% rate for all takings that you receive on or after 4 January 2011, except where your customer is paying for something he or she took away (or you despatched) before 4 January, in which case, your sale took place before 4 January and you must use the 17.5% rate.
If you are a business that sells mainly to other VAT registered businesses and have to issue VAT invoices, you should use the 20% rate for all VAT invoices that you issue on or after 4 January 2011 and which are issued within 14 days of your providing the goods or services (or any longer period for invoicing which you have agreed with HMRC).
There are special rules for supplies which span the change of rate and for businesses that make continuous supplies of goods or services (see Q5 below).
2. How do I deal with VAT inclusive prices?
If you charge a VAT inclusive price, you should use the VAT fraction to work out the VAT element. The VAT fraction for the 20% rate is 1/6.
3. How do I correct VAT charged at the wrong rate?
If you charge the wrong rate of VAT on an invoice, you will need to provide your customer with a credit note to cancel the original invoice and issue a new invoice at the correct rate.
4. What about deposits or pre-payments?
The normal rule is that you should account for VAT on a deposit or pre-payment at the rate in force when you receive it. You do have the option, however, to charge 20% on a deposit received before 4 January 2011, where the goods or services will be supplied after that date. This may simplify matters where your customer is able to recover any VAT charged.
Note that there will be limits on the extent to which the 17.5% rate may be used for deposits or prepayments for certain supplies of goods or services provided on or after 4 January 2011 when the standard rate changes to 20%. HMRC will seek to prevent businesses from using the deposit mechanism as a way of avoiding charging the higher rate of VAT (see Q8).
5. What are the "Special Rules"?
Under the normal rules, standard rated supplies with tax points created by payments received or VAT invoices issued on or after 4 January 2011 will be liable to the 20% rate.
As mentioned under Q1 above, however, there are optional change of rate rules that you may be interested in applying. You can apply the rules selectively to different customers and can adopt them without notifying HMRC. The special rules may be used where you provide goods or perform services before 4 January 2011 and raise a VAT invoice and, in some cases, receive a payment after the rate change.
So, for example, if you issue a VAT invoice on or after 4 January 2011, for goods you provided, or services that you completed before 4 January 2011, you can, if you wish, apply the 17.5% rate.
If you make a continuous supply of goods (e.g. gas, electricity or water liable at the standard rate) or services (e.g. leasing equipment) and are currently applying the tax point rules at paragraphs 14.3 and 30.10 of the VAT Guide (HMRC Notice 700), you may account for VAT at the 17.5% rate on that part of the supply made before 4 January 2011. This is the case even if the normal tax point occurs later (e.g. where a payment is received in arrears of the supply).
If you make a single supply of a service which is nevertheless carried out over a period which commences before 4 January 2011 but is not completed until after that date (e.g. decorating a house), then unless you have received payment or issued a VAT invoice before 4 January 2011, the whole supply should be charged at 20% under the normal rules. You may, however, if you wish, charge VAT at 17.5% on the work done up to 3 January 2011 and 20% on the remainder. You will need to be able to demonstrate to HMRC that the apportionment between the two amounts accurately reflects the work done in each period.
6. What VAT can I claim back on my purchases where I have less detailed VAT invoices?
Less detailed VAT invoices show a VAT inclusive value, and the VAT rate applicable, but do not always show the VAT amount separately. To calculate the standard rated VAT element included in this value you must use the appropriate VAT fraction (7/47 for 17.5% rate invoices and 1/6 for 20% rate invoices).
7. do I deal with goods sold before rate change and returned afterwards?
The rate of VAT to be used for credit notes or debit notes is the one which was in force at the time of the original supply.
8. Will I be affected by the anti-forestalling legislation?
Thlegislation will affect you if you receive a payment or issue a VAT invoice before 4 January 2011 for goods and services that you are to provide on or after that date and one or more of the following conditions is met:
a) you supply the goods or services to a connected person (such as another business controlled by you);
b) you provide or arrange funding of your customer's payment;
c) you issue a VAT invoice to your customer that does not have to be paid in full within six months; or
d) the payment or VAT invoice is in excess of £100,000 and this is not commercial practice.
The legislation may also affect you if, before 4 January 2011, you supply rights or options to receive goods and services from you on or after that date, free of charge or at a discount.
Even then, the legislation will not affect you if the recipient of your supply (the "customer") can recover the VAT on that supply in full.
The legislation extends the connected party test to cover the situation where there is a series of supplies of the same, or substantially the same, goods or services –e.g. company A supplies company B which, in turn, supplies Company C. In these circumstances, if any supplier in the series (say A in the example) is connected to the customer (C), the supplementary charge will apply to the eventual supply to the customer (C). This is to prevent a connected supplier and customer avoiding the test by inserting a cop-operative unconnected person into the supply chain between them.
9. When is Finance Provided by a Supplier?
For the purposes of the "providing finance" test, the legislation sets out the circumstances in which a supplier or a person connected with the supplier is treated as financing the payment for a supply of goods or services or the grant of a right to receive goods or services.
A payment is financed by a person if, directly or indirectly, the person:-
a) provides funds to enable the customer to make the whole or part of the payment; or
b) arranges for someone else to provide such funds; or
c) provides or arranges funds to discharge someone else's funding of the customer.
"Providing funds" can include making loans, providing guarantees or security for loans, subscribing for shares or other securities, or other transfers of assets or value which make funds available to the customer.
What are Listed Supplies?
The legislation also makes special provision for what are referred to as "listed supplies". These are supplies which ordinarily do not have a basic tax point (e.g. continuous supplies of services) or, in the case of services, the basic tax point is preceded by periodic billing or payment. This applies to the following supplies:
a) a supply of services;
b) a supply arising from the grant of a major interest in land (basically rentals under a long lease);
c) a supply of water other than;
- distilled or deionised water or water of similar purity; or
- bottled water;
d) a supply of:
- coal gas, water gas, producer gases or similar gas;
- petroleum gases, or other gaseous hydrocarbons, in a gaseous state;
e) a supply of power, heat, refrigeration or ventilation; and
f) a supply of goods together with services in the course of construction, alteration, demolition, repair or maintenance of a building or civil engineering work.
For the purposes of these "listed supplies", the basic time of supply occurs at the end of the period to which an invoice or payment relates. If, therefore, a payment is received or a VAT invoice issued before 4 January 2011 for a listed supply, covering a period ending on or after that date, the supplementary charge will be due.
The rule is modified if the period covered by the VAT invoice or payment includes more than one billing period. In that case, the end of the billing period becomes the basic time of supply for the goods and services provided in that billing period. In such cases, the consideration for the listed supply must be apportioned between the billing periods concerned to ensure that no supplementary charge arises in respect of goods or services provided in billing periods ending before 4 January 2011.
The supplementary charge does not apply to a payment or VAT invoice for a premium under a lease granted before 4 January 2011, where the lease extends beyond that date. In relation to the premium, the lease is treated as having been supplied on the date it is granted, rather than when the lease ends.
Also to be noted is that there is no supplementary charge on prepayment or advance invoicing of rentals if the prepayment or VAT invoice is for a period of not more than a year and is in accordance with normal commercial practice when no VAT rate increase is expected.
The information contained in this article is given for general information only and does not constitute legal advice on any specific matter.