Insider Media Limited

The standard rate of VAT is increasing to 20 per cent on 4 January 2011. Mike Sheppard, head of Grant Thornton’s VAT team in the Midlands, answers some of his clients’ most frequently asked questions. All answers are for general guidance only.

Q: Some of our customers cannot recover VAT so the 20 per cent rate will be a real cost to them. How can we reduce the impact?

A: There is still time to bring supplies forward. For VAT purposes the default 'time of supply' is when goods are made available or services are performed, but this is brought forward if an invoice is issued or payment received on an earlier date.

There are two important caveats to note:

1. By creating a 'tax point' in, say, December 2010, you will be obliged to account for and pay the VAT in your return covering this period.

2. To limit the scope for VAT planning, HMRC has introduced 'anti-forestalling' provisions to prevent these 'time of supply' rules being exploited. These impose a supplementary charge of 2.5 per cent in certain cases, notably where the customer is 'connected' with, or funded by the supplier; when an invoice does not fall due for payment until more than six months later, or when the total value of supplies to a customer exceeds £100,000.

Q: What do we do about contracts which span the rate change?

A: The VAT rate applicable to a supply is determined by the 'time of supply' or 'tax point' of the transaction. This is usually the invoice date, although there are exceptions as noted above.

Where you supply goods or services in December but your invoice is not issued until after 4 January, you can choose to charge VAT at the old 17.5 per cent rate if you wish.

If you are a contractor who starts work on a job this year and finishes after 4 January, you can choose to account for VAT at 17.5 per cent on the work done up until 3 January and at 20 per cent on the remainder.

Where deposits are taken, VAT will be applicable at 17.5 per cent on any amounts received or invoiced before 4 January - subject to the 'anti-forestalling' rules referred to above.

Q: Do we just need to change the accounting system so that our invoices show the 20 per cent rate?

A: Whilst altering the VAT coding on accounting and support systems is a key action, previous rate changes have highlighted the importance of also allowing sufficient time to address other operational issues. These may include, for example, updating prices and marketing materials; revising barcodes and till systems; training staff in accounting and customer service roles, and liaising with both customers and suppliers.

It is often preferable to introduce an additional (i.e. 20 per cent) VAT code to your accounting system rather than just amending a single 'standard rate'. This allows transactions at the different rates to be separated and purchase invoices and credit notes to be processed correctly.

Q: I'm planning to treat myself in the New Year, should I buy now?

A: From a VAT point of view, yes! The rate change may have a significant impact on the cost of larger, more expensive items.

If you are thinking of buying a yacht or helicopter (and yes, some still are!) there’s further reason to act quickly. If the asset is going to be used for both business and private purposes, you may be entitled to recover some of the associated VAT. If expenditure is incurred before the end of 2010, you can opt to recover all of the VAT upfront and then repay the element relating to private use over a five-year period. This is beneficial from a cash flow perspective.

Of course, VAT is not the only consideration. Variables such as price promotions, exchange rates and effective negotiation are all relevant in determining the final purchase price.

If you would like help on these issues or have other VAT concerns, please e-mail the Grant Thornton VAT team at: VATmidlands@uk.gt.com.

Return to the VAT surgery homepage