VAT Update
VAT Rate Changes from 1 January 2010
Since 1 November 2008 the standard rate of VAT has been temporarily reduced to 15%. On 1 January 2010 this temporary reduction ends and the standard rate of VAT will revert back to 17.5%.
Below is some guidance on the most likely scenarios you will face when invoicing your customers around the change of rate. This is based on the official guidance issued by HM Revenue & Customs, which can be found in full at http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-changes.htm
Goods or services provided before 1 January 2010, invoice issued on or after
Provided goods have been delivered or services completed before 1 January 2010, you can if you wish choose to apply the 15% rate even if your invoice is not issued until after 1 January 2010.
Invoice issued or payment received before 1 January 2010, goods or services supplied on or after
It is at your discretion whether you choose to charge VAT at 15% or 17.5% in these circumstances, subject to the special rules set out below.
Continuous supplies in progress on 1 January 2010
If you are providing services on an ongoing basis, you can either time apportion any invoice that spans the change of rate or charge 17.5% on the full amount of your first invoice on or after 1 January 2010.
E.g. a business provides office machinery and invoices its customers every quarter in arrears. When they issue an invoice on 31 January 2010 they can either charge VAT at 15% on the part relating to November and December 2009 and 17.5 % on the part relating to January 2010, or 17.5% on the full value of the supply.
Single supplies over a period of time
A supply of a single service such as major refurbishment works may begin prior to 1 January 2010 but continue beyond that date. Unless payment has already been received or a VAT invoice issued prior to 1 January 2010, the whole supply would be charged at 17.5% under the normal rules. However, where a business can support an apportionment based on the charging of a daily or hourly rate for example, the invoice can be apportioned between the work done prior to 1 January 2010 and work done on or after this date with VAT charged appropriately.
Where the customer is making stage payments during the work, VAT should be charged at the appropriate rate at the time the invoice is raised or payment received subject to the special rules below.
Special rules on artificial arrangements
Legislation has been introduced to prevent suppliers artificially invoicing customers at 15% where under normal business practice the 17.5% rate should be charged.
It only applies to certain transactions, and takes effect where:
• Prepayments are received or advance VAT invoices are issued between connected parties (such as a company and its directors or any other business under common control)
• VAT invoices are issued that do not have to be paid for six months or more
• Pre-payments are received or VAT invoices issued in excess of £100,000, other than where this is normal commercial practice
• Funding is provided or arranged by a supplier to enable customers to pay for goods or services in advance
• Rights or options are granted to receive goods either free or at a discount
In these circumstances, and where the customer is unable to recover the VAT charged, a supplementary charge of 2.5% will become due on 1 January 2010 if VAT was charged at 15% on the original supply
For those customers using Sage products, we have produced two articles giving guidance on changing the VAT rate within Sage