Taxing questions

As you will be aware, the VAT rate is due to revert to 17.5 per cent with effect from 1 January 2010. The following guide considers the steps that you should be taking to plan for the change. The change only applies to the standard VAT rate. There are no changes to sales that are zero-rated or reduced-rated for VAT.

Please note that the following notes are meant for general guidance only and should not be regarded as a substitute for taking specific advice on your own circumstances.

What should you be doing now?

There are a number of steps that you should be looking at now in order to plan for the change.

1) IT system

Firstly, make sure that your IT systems are ready for the change. Generally they should be able to cope with more than one standard rate of VAT but it is important that the change over is managed properly. Accordingly, it would be worth ensuring that your IT departments are ready for the change and are able to address issues such as invoices (and credit notes) at different rates, cut off procedures and producing appropriate documentation (e.g. VAT sales invoices, where necessary).

2) Sales invoices and output VAT

For any sales of standard-rated goods or services that you make on or after 1 January 2010 you must charge VAT at the rate of 17.5 per cent. Obviously, the number of sales invoices you produce should be fairly limited, but where this does happen, you should ensure that they show the correct rate after 31 December.

Generally, your invoices should follow the normal time of supply rules and it will not be necessary to split your invoices between the periods pre and post-31 December. Bear in mind however, that in situations where your customers are unable to recover the VAT you charge to them, it may be the case that they come back to you and request invoices at the 15 per cent rate for the period up to 31 December (see below for further details).

3) Purchase invoices and input tax

Obviously, in situations where the VAT incurred can be recovered, (e.g. where it relates to a VAT Shelter arrangement or other taxable supply), there is less of an issue. In most cases however the increase to 17.5 per cent will represent an additional cost so it would be worth ensuring this is minimised wherever possible.

Invoices dated December and earlier

These should generally be at 15 per cent. This applies even if they cover a period post 1 January (please note that there is some anti-avoidance legislation in this area – see below).

Goods and services provided pre-1st January – Invoiced on or after 1st January

• These would generally be invoiced at 17.5 per cent but you can request that the supplier invoices at 15 per cent - It would be worth approaching suppliers now and requesting that this is the case. The supplier does not need HMRC approval to charge at the 15 per cent rate.
• For goods and services delivered or performed up to and including 31 December, staff should check that these are charged at 15 per cent, even if the invoice is dated January. Where the charge is found to be at 17.5 per cent, it may be worth approaching the supplier and requesting that a credit note for the additional amount charged. The credit note for the additional 2.5 per cent VAT should be issued within 45 days of the rate change – i.e. by 14 February.

Goods and services spanning the rate change

If work is started on a job before 1 January 2010 but finished afterwards the supplier may account for the work done up to 31 December 2009 at 15 per cent and the remainder at 17.5 per cent. If they choose to do this they will have to be able to demonstrate that the apportionment is fair.

For major works and other significant ongoing contracts therefore, it would be worth contacting the suppliers now and asking them to measure the amount of work undertaken to 31 December and ask them to invoice this element at 15 per cent.

Continuous supplies of services

If you receive a continuous supply of services, such as leasing of photocopiers and certain audit and accountancy or legal services, the supplier will account for the VAT due whenever a VAT invoice is issued or payment received, whichever comes first. VAT is charged at 17.5 per cent on invoices issued and payments received on or after 1st January 2010. Again, the suppliers can choose, if they wish, to charge 15 per cent on the services provided in the period up to 31 December 2009 and 17.5 per cent on the remainder. They will have to be able to demonstrate that the apportionment is fair. Accordingly, it may also be worth approaching these suppliers and asking them to invoice the pre-January elements at the 15 per cent rate.

4) Anti-forestalling legislation

In order to prevent organisations from continuing to receive goods and services at 15 per cent following the change, certain anti-avoidance legislation has been introduced.

The legislation applies in certain specific instances but in essence imposes a 2.5 per cent supplementary charge where the ‘basic time of supply’ (i.e. when the goods are delivered or work performed) falls on or after 1 January and the goods or services are invoiced or paid for before. There are special rules for certain supplies such as services and building work, which deem the ‘basic time of supply’ to be at the end of the period to which an invoice or payment relates.

The legislation will affect you if you make a payment or are issued with a VAT invoice before 1 January 2010 for goods and services that you are to receive on or after that date and one of the following conditions is met:

• the supplier of the goods or services is a connected person (such as another business controlled by you); or
• the supplier provides or arranges funding of your payment; or
• you are issued with a VAT invoice that does not have to be paid in full within six months; or
• the payment or VAT invoice is in excess of £100,000, and this is not normal commercial practice.

Even if any of the conditions are satisfied, the additional charge only applies if you cannot recover all VAT charged.

5) Other

• Bad debt relief: Where debts are unpaid and you claim VAT bad debt relief it will be necessary to check at which rate you originally accounted for the VAT and recover based on this. Also, where the debt is subsequently paid and you are repaying the relief, make sure that you do not account at 17.5 per cent when you only claimed 15 per cent relief.
• Deposits: If you issue a VAT invoice or receive prepayment before 1 January 2010 for goods or services which you will provide on or after that date, VAT will normally be due at the 15 per cent rate. In certain circumstances the supplementary charge of 2.5 per cent will become due on 1 January 2010 (see anti-forestalling legislation above).
• Credit notes: These should be raised or received at the same rate as the original supply.

Roy Knowles is a VAT expert within consultancy Tribal’s housing finance and treasury team

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