8 November 2010
Impending VAT Rate Change
Most of the information supplied below is relevant to businesses supplying the general public although we are all of course a consumer in our personal lives .
It is important to note the effective date for the increase in the Standard Rate of VAT to 20% is the 4th January 2011.
A number of businesses will be able to defer the impact of the increase and these are the ones who invoice customers who are unable to recover VAT. This may typically apply for example in construction or in a business with a membership fee.
Whilst there are rules to prevent avoidance these do not impact in most 'normal situations' and the traditional VAT tax point rules apply. Put very simply the VAT point is the earliest of invoice date or payment date. So if you invoice your customer on the 4th January and they haven't paid you prior to that date the rate is 20%. The date is particularly significant because if you invoice on 31st December or 3rd January the rate for both is 17.5% although the former may be affected by an earlier payment of the VAT to HMRC if the quarter ends on 31st December.
The following are NOT 'normal situations':
- the parties are connected OR
- the supplier of the service lends money to the customer OR
- payment is due more than six months after the invoice date OR
- the amount exceeds £100,000.
So a business running a club whose membership runs to 31st December would invoice for the year to 31st December 2011 at any time on or before 3rd January 2011 at 17.5% provided payment is due by 30th June (even if payable monthly over the 6 months). If payable over 7 to 12 months the rate is 20%.
A house extension to be undertaken during 2011 (and payment due no later than 30th June) would be charged at 17.5% on an invoice raised on or before 3rd January.
A wedding to take place (and payment made) prior to 30th June 2011 would be charged 17.5% on an invoice raised on or before 3rd January.
If you are incurring significant expenditure during 2011 and wish to retain the 17.5% rate of VAT always act commercially and do not be tempted to pay in advance for work which has not been completed.
Please contact us at the Shrewsbury office if you require comment on your specific circumstance.
