I’ve had a lot of queries about the VAT rate rise and how it will affect specific transactions. And in most cases, there is a lot of unnecessary confusion about certain aspects of the change and I thought it was worth reminding everyone of the most important principle:
Normal tax point rules will apply in most cases!
What this means is that in order to decide whether or not you charge VAT at 15% or 17.5%, you have to go back to the basic principles of VAT and establish the “tax point” or time of supply. There is a detailed section in HMRC’s Notice 700: The VAT Guide on this subject and I also wrote a short article here https://vatexchange.co.uk/node/29 last year if you want a brief introduction.
Under the tax point rules, there is a “basic” tax point which is normally when goods are made available to customers or the provision of services is completed. However in most cases this will be over-ridden by one or other of the dates on which the invoice is issued or the payment is received and this becomes the “actual” tax point.
So queries about transactions involving pre-invoicing or what to do when a contract for services runs over 31 December/1 January can in most cases be dealt with under the normal tax point rules.
The rules affect different businesses in different ways and that’s what you need to check.
Most people are getting confused about how the change affects different types of business or transactions. And of course it does affect different types of businesses, such as retailers or those using special schemes such as the Flat Rate Scheme or Cash Accounting, in different ways. So you need to check the guidance given by HMRC here http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-changes.htm to see how it will affect your business or your clients’ businesses according to the tax point rules that affect different business sectors. The guidance is well written with separate sections for different types of business or schemes.
Otherwise, there are only 2 situations when the normal tax point rules won’t apply to the change of rate.
These deal with the two oppositive scenarios:
- Where the goods or services have been physically supplied before 1 January (ie the “basic” or “performance” tax point) but the invoice is not issued nor payment received until on or after 1 January, ie supplies that “span” the change in rate.
- Where the business has issued an invoice or received payment before 1 January for supplies which will be physically supplied on or after 1 January
There are specific rules for each of these situations.
One: Supplies “spanning” the change in rate: Goods or services physically supplied before 1 January
So in this case, you’ve delivered goods to your customer or finished a contract for services in the final 2 weeks of December. Payment is due on the invoice date and as long as you issue the invoice within 14 days of the basic tax point, the date of the invoice becomes the tax point. If this is on or after 1 January, then the rate would be 17.5%.
What the change of rate rule means is that you can choose to account for VAT at 15% in these circumstances. Which seems to make sense to me, even if your customer can recover all of the VAT, it’s still a useful cashflow saving to use the lower rate. But remember that the goods must be delivered and/or the services completed on or before 31 December.
Two: Anti-forestalling legislation: VAT invoices issued or payment made before 1 January
This is the anti-avoidance rule.
This deals with the opposite scenario where the supplier issues an invoice or receives payment before 1 January for any supply for goods which will be delivered or services carried out on or after 1 January.
Under the normal rules, the issue of a VAT invoice or receipt of payment would create a tax point which means that the date of the invoice or payment would be the tax point and the liability would be 15% (ie “forestalling” the increase). This provides an opportunity for recipients of supplies who can’t recover some or all of the VAT to reduce their VAT costs. And yes, in principle, this is perfectly legal and acceptable.
But to prevent large scale abuse of the rule, HMRC have introduced some anti-avoidance rules which apply in certain cases where the recipient of the supply can’t recover all of the VAT. The details are explained here on the HMRC website http://www.hmrc.gov.uk/vat/forms-rates/rates/anti-forestall-guidance.pdf but the main provisions deal with the following:
- Transactions involving connected parties or where the funding for the pre-payment is provided by the supplier or person connected with the supplier; or
- Transactions valued at £100,000 net of VAT or higher; or
- Transactions where payment is not due in full within six months.
But these only apply if the customer is not entitled to recover any or all of the VAT on the supply concerned.
This means that for the great majority of business transactions, you can take advantage of the 15% rate if you issue your invoice or receive payment on or before 31 December.
How do I find out more?
There is a lot of information about the VAT rate rise and how it affects different businesses here http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-changes.htm on the HMRC website, as well as the more detailed guidance mentioned above. I’d strongly recommend having a look at the information that is available to see if and how the change will affect your business or your clients’ businesses. Last year, the rate was headed downwards and the change of rate rules could be used to generate the lower rate. This year the rate is headed upwards and although the change of rate rules are optional, make sure that you or your clients have applied the rules correctly to be certain if and when the business is entitled to take advantage of the lower rate.