There are now only two months remaining before the standard rate of VAT climbs from 17.5 per cent to 20 per cent, and VAT-registered businesses are being urged to ready themselves for the change.
The increase was announced in June’s emergency Budget and means that any sales of standard-rated goods or services made on or after 4 January 2011 must carry a VAT charge of 20 per cent.
For cash businesses that work out their VAT charge using the fraction – that is, calculating the amount of VAT from a VAT-inclusive total – the ratio will be 1/6 as from 4 January.
The increase only covers standard-rated goods and services. Zero-rated (0 per cent) and reduced-rated sales (5 per cent) will see no change, nor will exempt goods.
Retailers will need to apply the new 20 per cent charge for all takings that are received on or after 4 January next year. If a customer pays on or after 4 January for an item that has been collected or delivered in advance of that date, then the sale is deemed to have occurred before the change-over and the old 17.5 per cent rate applies.
In the case of VAT invoices, the 20 per cent charge must appear on bills raised on or after 4 January.
There are, of course, issues over sales that span the change-over date. A business that supplies either goods or services before 4 January but issues an invoice after 4 January can opt to apply the old 17.5 per cent rate if they wish.
Where a business begins work on a job before 4 January but doesn’t complete the project until after that date, it may charge VAT at 17.5 per cent for time and resources up to 3 January and VAT at 20 per cent on or after 4 January. But businesses will be under an obligation to show that the division between the two rates is fair and accurate.
Where the supply of services is continuous – say, leasing equipment or a consultancy service – a business must charge VAT at 20 per cent on invoices issued and payments received on or after 4 January. It can, however, apply the 17.5 per cent rate for the services that have been supplied up to 3 January and the 20 per cent rate thereafter.
Should a business send an invoice or take payment in advance of 4 January for services or goods that are then supplied on or after that date, the 17.5 per cent charge should normally be charged. But they can, if they choose, charge at 20 per cent.
Businesses that use the cash accounting scheme will have to separate payments taken on or after 4 January from sales made before the change-over date. This is because the old rate will apply to them.
Those operating the flat rate scheme will need to be aware of the new percentage rates that take effect as from 4 January. Firms with a VAT-exclusive turnover of £150,000 can use the flat rate scheme. Since the threshold is VAT-exclusive, the new rate won’t affect it. But firms with a VAT-inclusive turnover of £225,000 must leave the scheme. That threshold will change to £230,000 after 4 January in order to take the VAT increase into account.
Similarly, the qualifying thresholds for payments on account – where there is an annual VAT liability in excess of £2 million – are to be amended to reflect the higher rate of VAT.
VAT return and payment dates, be they monthly, quarterly or annual, will remain unchanged. For periods that cover the change-over date, businesses will need to combine the sales that carry the 17.5 per cent charge and the 20 per cent charge in order to calculate the total VAT sales figure.
There is a relatively simple method for calculating the effect that the VAT lift will have on prices.
This is to multiply old prices by 120/117.5. An item that costs £1000 is multiplied by 120 to give 120,000. It is then divided by 117.5 to produce £1021.28.
Businesses do not have to pass the increase on to customers but they will have to pay HM Revenue and Customs the additional VAT.
Tips on preparing for the change
Any business that has questions about the time of supply and the tax point for any VAT transaction should contact their accountants to make sure the relationship between the two is correct.
It is important, also, to make sure that books are kept in good order, particularly for sales that span the transition period. And to ensure that any accounting software is updated to accommodate the new rate.
Retailers need to adapt their till systems so that the VAT increase is made automatic on or after 4 January.
Customers should be reminded that the change is coming into effect so that the increase in price does not come as an unpleasant surprise. Offering some examples of what invoices will look like after the change may be helpful.
If a business is planning the purchase of a major item, then it might be advisable to buy before 4 January.
The emergency Budget introduced ‘anti-forestalling’ rules which are intended to prevent businesses and customers taking unfair advantage of the change in VAT rate.
In those instances where the rules apply, a supplier that has charged VAT at 17.5 per cent will be required to issue a supplementary invoice for an extra 2.5 per cent of VAT on 4 January.
The extra charge comes into effect when a customer is unable to reclaim the VAT charge and one or more of the following conditions apply: the supplier and customer are ‘connected’ – such as associated businesses – or the supplier funds the purchase – perhaps by lending the customer money – or a VAT invoice is issued but is not due to be paid for at least six months, or a pre-payment of above £100,000 is made before 4 January for goods or services to be delivered once the VAT increase has happened.