VAT – coping with the rate rise

On 4 January 2011 the standard VAT rate will change to 20% from 17.5%.

For many professional practices the change of VAT rate brings the usual headache over dealing with fees and invoices for work performed before the rate change or which may even take place over the rate change.

For those professional practices using the conventional reporting of fees - the tax invoice system - under the normal rules the tax point is created by payments received or VAT invoices issued. In these cases, events on or after 4 January 2011 will attract a VAT rate of 20%. HMRC have a number of optional rules (which do not need approval) for accounting for VAT especially where the change of VAT rate affects supplies that may be in progress or where services are performed before 4 January 2011 but where the VAT invoice is raised or payment is received after the change of rate.

Example 1:

You issue a VAT invoice on or after 4 January 2011 for services completed before 4 January 2011. You can, if you wish, apply the 17.5% rate. We are aware that some computer software makes it difficult (or impossible!) to incorporate two standard rates of VAT. Where this is the case, VAT will need to be calculated manually and adjustments made to the VAT returns accordingly.

Example 2:

The work you are doing is in progress at 4 January 2011 and continues after that date.

The normal rule is that where the invoice is issued or payment is received on or after 4 January 2011, VAT at 20% will be due even if part of the work was performed before the rate change. The VAT rate change guidance will allow for VAT to be charged at 17.5% on work performed up to 3 January 2011 and at 20% thereafter. It is essential to demonstrate a fair and equitable apportionment of the work carried out in each period.

Example 3:

You receive payment or raise an invoice before 4 January 2011 for work that will be carried out after 4 January 2011.

The normal rule is that VAT can be accounted for at 17.5% subject to certain anti-avoidance rules. The VAT rate change guidance will allow for VAT to be charged at 20% on the payment or amount invoiced before 4 January 2011, although we cannot see a commercial reason why you would opt for 20% instead of 17.5%. Any decision will also be affected by whether the client is able to claim all the VAT charged. Clearly, if the client is a private individual and cannot then this is not a wise course of action.

Urgent action needed!  If we are your tax advisers, we encourage you to send us your tax information as soon as possible so we can complete your tax returns before January and help you to avoid an extra 2.5% VAT on fees.

If you need any guidance on how to manage the VAT rate change, get in touch with your usual Buzzacott contact or with Darren Aldrich – VAT Partner on 020 7556 1301 (email: aldrichd@buzzacott.co.uk) or Peter Bright – VAT Director on 020 7556 1335 (email: brightp@buzzacott.co.uk).