I’ve had a number of queries over the past few weeks about the change in VAT rate and these ones below are typical of the issues that people are concerned about. Because the rate increases on 1 January many businesses want to ensure that they are taking full advantage of accounting for the lower rate of VAT and there are some perfectly legitimate rules for doing this within the legislation. Just remember to double check the HMRC guidance for detail on your type of business or transaction.
The main confusion concerns transactions that span 1 January and I’ve tried to cover the main issues below. In principle remember that normal tax point rules apply unless you want to take advantage of the “change of rate” rule which I’ve mentioned below.
Supplies spanning the change of rate
What this rule does is says that if the goods or services are supplied before 1 Jan and you issue the invoice/receive payment after 1 Jan, then you can choose to account for VAT at 17.5% or at the pre-increase rate of 15%. I can’t imagine why anyone would want to opt for the 17.5% rate but you can if you want to! But the point is that normal tax point rules apply UNLESS you want to take advantage of the change of rate rule and account for VAT at the lower rate.
If I bill now for goods or services that will be supplied in January can I charge VAT at 15%?
Yes. Remember that the normal rule applies as far as issuing VAT invoices is concerned. If a VAT invoice is issued or payment received for the goods or services in advance, then the tax point is the earlier of the date of invoice or payment. So if you issue a VAT invoice now for goods or services to be supplied in January (assuming payment is later than the date of invoice) then the rate is 15%. See section 3.2 of the HMRC guidance here http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-rise-guidance.pdf.
What happens if you are, on the same bill, billing for work done to date and also work to be done in January
The tax point for services straddling the change in rate depends on whether it’s a single supply or a continuous supply. If it’s a single supply which started before 1 Jan and ends after 1 Jan – eg a construction contract – then the 15% rate applies to the whole contract. If it’s a continuous supply – eg monthly rental payments for leased equipment – then the new rate applies to payments due on or after 1 Jan. See section 3.3 of the guidance for further details.
Is it true that people on the cash accounting scheme can effectively get stitched up by a company not paying a pre 31 December invoice until post 1 January ie would the recipient company then have to account for the additional 2.5%?
No. The issue is not when the payment is made but when the supply is made. Remember that all that the cash accounting does is allow you to defer paying the tax on the supply until you receive payment, it doesn’t change the tax point of the supply concerned. And it’s the tax point that determines the liability, not the date of payment.
Bear in mind that under the normal rules of the cash accounting scheme, it (ie the scheme) can’t be used if the invoice is issued prior to the basic tax point. This is to prevent abuse of the scheme. So for the purposes of this query, I’ve assumed that the invoice would be issued on or after the date on which the goods or services are physically supplied, ie the basic tax point. If is before 1 Jan, the rate is 15% because the supply was made before 1 Jan.
You will have to retain a separate record of payments made after 1 Jan that relate to supplies made prior to 1 Jan so that you can correctly identify which payments relate to supplies at 15% and 17.5%. See section 8.3 of the guidance for further information.
And finally: Anti-forestalling legislation
As you’d expect, there is also anti-forestalling legislation to prevent avoidance schemes by businesses who are partly exempt and want to avoid the increased rate. These generally apply to supplies between connected parties or large value/deferred payment invoices (over £100k/6 months) – see section 11 of the guidance for a summary of the rules. They probably wouldn’t apply to normal commercial transactions such as the ones that I’ve mentioned above.
Let me know if you have any further queries about the rate change.
Marie