Essential Guide to the VAT rate Change

On January 4, 2011, the standard rate of VAT will change to 20% from 17.5%.  This will pose an all-too familiar challenge for businesses who have to assess fees and invoices for work done just before the rate-change or straddling it.

HMRC guidance is comprehensive, but there will be confusion over which rate to apply because of different fee and invoicing arrangements.

Sometimes, this will stem from an arrangement whereby fee notes only become VAT invoices when they are receipted. The tax-point then is the date payment is received, so fees received on or after January 4 will be liable for VAT at 20%.

However, there is latitude in the guidance for fees received on or after January 4; if the work was completed before the change-date, the 17.5% rate can be applied. Similarly, if payment is received after January 4 for services rendered over a period when both rates applied, VAT can be apportioned to reflect what was done, when, both before and after the change to 20%.

The normal rule for billing conventionally is that the tax-point is created by the receipt of payment or the issue of a VAT invoice – either of which would attract the 20% rate if on or after January 4.

But HMRC offer a number of options - which can be invoked without approval - to account for VAT, especially where the change-date falls during “work in progress”, or where services are rendered before January 4 but either billed or paid for after it.

If, for example, you issue a VAT invoice on or after the change-date for work completed before it, you can apply the 17.5% rate. If the work is in progress at January 4, and continues after it, the normal rule is for VAT at 20% to be added to the invoice or payment even if some of the work was completed before the change.

That said, there are circumstances where the rules allow VAT to be charged at 17.5% for work done up to January 3 so long as any done subsequently is rated at 20%. The important thing is to demonstrate a fair and credible apportionment of the work done in each period.

Again, it may be that you receive payment or issue an invoice before January 4 for work to be provided after it. Normally, VAT would be applied at 17.5%, subject to certain anti-avoidance rules. But under the new guidelines, the 20% rate may be charged. 

So should you do so?  Yes, if the client can claim it back, but probably not if they can’t.

Peter Bright is a Director in the VAT team.