VAT rate rise to 20% on 4 January 2011

Planning for the change to the rate of VAT will mean examining what rate of VAT can apply to supplies of services and goods before, during and after the change. The current VAT rate is 17.5%.  If your clients cannot claim in full the VAT that you charge or you cannot reclaim VAT in full, the additional 2.5% VAT increase can be an additional financial cost to any business.

The rules vary for services and goods.

Services

If the services were supplied prior to 4^th January 2011 then the VAT rate applicable is 17.5%. If the services are supplied after 4^th January 2011 then the VAT rate is 20%. However there is one exception and that is if the invoice for work to be carried out is issued before 4^th January 2011 and the invoice is payable within 6 months the rate of VAT will be 17.5% irrespective of when the service is delivered.

Where services are supplied either side of the 4^th January 2011 then it is accepted that the service can be split between the two rates provided the split is fair and reasonable, unless as above the invoice was issued before the 4^th January 2011 and payable within 6 months.

If an invoiced is issued after 4^th January 2011 but all the work was carried out prior to 4^th January 2011 then the VAT rate can be 17.5%

The one proviso is that the amounts involved are less than £100,000 per client or customer.

There are also special rules for connected parties.

However, one word of warning, by billing early this will create a tax point and the VAT charged on the invoice will be due to HMRC, irrespective if your client has paid you in part or full, in line with your normal accounting periods.

Goods

If an invoice is issued or payment made or the goods are made available to the purchaser a tax point is created and the correct rate of VAT would be the rate of VAT in force on that date.

So if a payment is made before 4^th January 2011 but the goods are only delivered after the 4^th January 2011 the VAT rate should be 17.5%.

For Charities and Businesses that cannot recover all of their VAT on purchases it may be worth considering bringing purchases forward if at all possible to delay the effects of the rate rise due on 4 January 2011.

If you are interested in examining the potential to plan for the VAT rate change on 4 January 2011 please contact Andrew Norman, VAT Manager at Buzzacott on Normana@buzzacott.co.uk or call 020 7556 1366.