In this month’s Tax Insider Lite, James Bailey reminds us of the VAT rate change due on the 1st January 2010 and of the problems, and opportunities, that may arise.
The temporary reduction in the rate of VAT from 17.5% to 15% ends on 31 December 2009. For many businesses, whose customers can recover their VAT in full, the change will not be of any great significance economically, but for those whose customers are unable to recover the VAT, there will be a real increase in costs.
As with any change in tax legislation, the increase in the VAT rate will produce opportunities as well as problems, and this article covers two of them.
Prepayments
One solution for those who cannot recover all or any of the VAT they are charged is to pay in advance for supplies.
Generally speaking, if a VAT invoice is issued after 31 December, and it relates partly to supplies that took place before that date, then it will be necessary to divide the amount payable into the supplies before 31 December (15% rate) and those that took place after that date (17.5% rate).
If the invoice is issued before 31 December, however, even if it relates partly to supplies that will take place after that date, the whole lot can be charged at the 15% rate.
It is not quite as simple as that, of course. To prevent abuse of the prepayment scheme, there are four situations in which you must apportion a prepayment between the two rates of VAT. This applies in each of the following cases:
•If you are “connected” with the customer – for example, if the invoice is from a partnership to a company controlled by the partners
•If the value of the supplies concerned is greater than £100,000
•If you lend the customer the money to make the prepayment to you
•If the invoice is not due for payment within six months of the date it is issued
Many transactions will not fall foul of these rules, however, and there may well be scope to improve your business’ cash flow while saving your customers some VAT.
A word of warning – the rules for the time of a supply are quite complex, and if you have any doubts about whether you can use the prepayment arrangements as described above, you should seek advice.
For Old Lang Syne
The other relaxation in the rules shows an almost human approach on the part of HM Revenue and Customs to a real problem.
Imagine it is 2am on New Year’s Day 2010. You have celebrated the New Year at a local restaurant that has stayed open until the early hours for its annual New Year party. With possibly more than the regulation four units of alcohol inside you, you have to cope with paying the bill.
You definitely remember ordering a magnum of champagne, but did you order it before or after midnight? The waiter is sure it was after midnight (17.5% VAT), and you are equally sure it was before (15% VAT).
Even HMRC have taken pity on us poor revellers, and to avoid situations like this, they have stated that businesses like pubs, clubs, and restaurants (which account for VAT based on the point of sale) can continue to use the 15% rate for supplies made after midnight on 31 December until they close at the end of the session (or until 6 am on 1 January for the real diehards). It will not matter exactly when you ordered that champagne!
James Bailey
