VAT Rate Change – 4th January 2011
The VAT fraction is used to calculate the VAT element of a price inclusive of VAT. For a 20% rate of tax, the relevant fraction will be 1/6. So if you fill up your car with petrol costing £50, the amount of VAT you have paid after 4 January 2011 is £8.33, i.e., £50 x 1/6. The VAT fraction for the 17.5% rate was 7/47.
Deposits paid or invoices raised in advance
If a business has raised invoices or received payments from customers before 4 January 2011, then VAT will have been correctly accounted for at 17.5%. However, if the goods or services are actually supplied after 4 January 2011, then the supplier may make an adjustment so that VAT is charged at the rate of 20%.
The adjustment must be made by issuing a credit note to correct the original invoice – the supply is then based on the 20% rate of VAT. This process is optional for a supplier and will only be worthwhile if the customer in unable fully to reclaim the VAT himself.
Work overlapping 4 January 2011
There is bad news for clients providing services (e.g. a builder) where the work is started before 4 January 2011 and finished after this date. In such cases, the VAT charge is based on the new rate of 20% when an invoice is raised or payment received at the end of the job. There is no need to apportion the VAT on a time basis between, for example, November and December work.
Credit notes raised after 4 January 2011
In cases where an invoice was raised before 4 January 2011 (charging 17.5% VAT) then any credit note subsequently raised against the invoice (e.g. to correct a pricing error or if some of the goods are returned) will be based on the percentage of VAT charged on the original invoice. So the credit note will refund VAT based on 17.5% even though it is being raised after 4 January 2011. This may cause some software problems for clients using computerised systems – a manual credit note may be the best option.
Flat rate scheme
Many businesses with annual taxable sales of £150,000 or less adopt the flat rate scheme i.e. where VAT is paid by applying a specific flat rate percentage to the gross sales made by the business. Most of the flat rates will be increased from 4 January 2011 to reflect the higher rate of VAT.
A full list of the appropriate flat rate scheme percentages from 4 January 2011 can be found in Annex D at http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf
Road fuel scale charges
Many businesses reclaim input tax on the road fuel they purchase for cars and account for output tax using scale charges published by HMRC to reflect private use. New scale charge rates apply from 4 January 2011.
A full list of the new road fuel scale charges can be found in Annex C at http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf
Fee bills and invoices
Many professional businesses will have raised ‘request for payment’ notes to clients in November or December in relation to work carried out on an ongoing basis. These documents are not tax invoices. For VAT purposes, this is known as a ‘continuous supply of services’ arrangement and VAT is payable according to the date when any tax invoice is raised or payment received from the customer, whichever happens first.
In the case of ‘request for payment’ notes raised in November or December, these will have requested VAT to be paid at 17.5%. If these requests are paid after 4 January 2011, then VAT is actually due at 20%. So this will create a debit balance on the customer’s ledger which must either be paid by the customer or carried forward to the next period
Legislation has been introduced to prevent avoidance (forestalling) where arrangements are made to account for VAT at 17.5% in advance of 4 January 2011 in respect of goods or services to be provided afterwards. The legislation will only apply to certain transactions and is unlikely to affect you unless a business:
• receives prepayments from persons connected to it for future supplies;
• issues advance VAT invoices to persons connected to it for future supplies;
• provides or arranges funding for customers to enable them to pay in advance for goods or services to be supplied;
• issues VAT invoices that do not have to be paid for at least six months;
• receives prepayments or issues advance VAT invoices in excess of £100,000, and this is not normal commercial practice; or
• supplies rights or options to receive goods and services from it free of charge or at a discount.
Detailed guidance on the operation of this anti-forestalling legislation is available at http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-increase.htm
Other VAT News
HMRC allows VAT on business entertaining for overseas customers
HMRC have announced a change in its policy regarding business entertaining, in light of cases heard before the European Courts.
Danfoss and AstraZeneca pursued the right to reclaim VAT when entertaining business customers from overseas and were ultimately successful in the European Courts of Justice.
It is important to note that the scope is limited to entertaining overseas customers and most general entertaining costs will therefore remain ‘blocked’. Where the costs do relate to overseas clients, HMRC will be interested to see if any output VAT might also be due in respect of any ‘private use’ element of the costs, so claims are unlikely to be straight forward. Nevertheless, for some businesses, this could be an opportunity to reclaim significant amounts of VAT and to reduce costs going forwards.
For further information, see HMRC’s Revenue & Customs Brief 44/10