VAT Holiday Over As Rates Expected To Return To 17.5%

The Government’s one-year VAT holiday will end on 1st January 2010, with rates expected to return to 17.5% from the 15% we have enjoyed all year.

HMRC have confirmed the normal tax point rules will apply: date of invoice or date of payment, whichever comes first.

So if the invoice or payment is made before 1st January, VAT will be at the rate of 15% - anything after that date will be charged at 17.5%. To help us through the transition, HMRC have issued some guidelines we should note:

VAT should be calculated at 17.5% from 1st January, using the VAT fraction 7/47ths. Those who reduced their prices last December (2.13 % was the calculated reduction) should increase them by that same figure. If the customer has an account and he takes the goods away prior to the change, then you account for VAT at 15%.

Businesses issuing VAT invoices after 1st January should calculate their VAT at 17.5%, unless the goods/services were supplied before the rate change, in which case you can choose to charge at 15%.
For supplies of services that span the change, you can charge 15% for services provided before the change, 17.5% afterwards or charge all at 17.5%
Suppliers issuing invoices prior to the rate change, but where delivery will take place after the 1st January, may charge VAT 17.5%

When issuing quotes and estimates for work to commence after 1st January you should quote the 17.5% rate. Customers willing to pay before that date can be charged at 15%, (subject to the anti-forestalling legislation – see below).

Refunds or credit notes should be dealt with at the same rate originally declared or invoiced.

Invoices issued for 12 months in advance, with monthly payments plus VAT, must show VAT at 15% up to 31st December 2009. Payments after that date must be at 17.5%

With ticket sales, the tax point is the receipt of payment. So if a ticket is purchased before 1st January 2010 the VAT rate will be 15%, even if the event takes place after the rate change in 2010.

Flat Rate Scheme

The increase in VAT will lead to changes to the Flat Rate Scheme percentages and to the Fuel Scale Charges - all effective from 1st January 2010. Those people whose VAT returns span the change will have to carry out two separate calculations.

Anti-forestalling legislation

With certain businesses, where the goods or services are supplied on or after 1st January 2010, anti avoidance rules have been put into place. These will apply if:

You receive pre-payments from persons connected to you for future supplies

You issue advance VAT invoices to persons connected to you for future supplies

You provide or arrange funding to your customers to enable them to pay in advance for goods or services to be supplied by you

You issue VAT invoices that do not have to be paid for at least six months

You receive pre-payments or issue advance VAT invoices in excess of £100,000, and this is not your normal commercial practice

You supply rights or options to receive goods and services from you free of charge or at a discount i.e. receive payment prior to the rate change for a supply to take place after.

These rules will not affect many businesses and they are only invoked if your customer cannot recover the VAT charged in full. More information is available here:

http://www.hmrc.gov.uk/budget2009/bn72.htm

To coincide with the changes HMRC have produced a guide, available on their website – http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-changes.htm. However, HMRC have not yet published the rates for the Flat Rate Scheme. We will update you once these have been published.

One final note, please keep an eye out for our Pre Budget Report update, when we will update you on changes to VAT.

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