Are you ready for the change back?

1st January 2010 will see the reintroduction of 17.5% VAT as the standard rate of VAT.

For sales of standard-rated goods or services that take place on or after 1st January 2010 businesses should charge VAT at the new rate of 17.5%.

This means that businesses currently calculating their VAT using the VAT inclusive fraction of 3/23 should revert to the old fraction of 7/47.

Special Rules

However, there are optional change of rate rules that you may be interested in applying. You can apply the rules selectively to different customers.

So, if you were to issue a VAT invoice after 2010, for goods provided, or services completed BEFORE 1st January 2010, you can, if you want to, apply the 15% rate.

You may also apply these rules even if you have issued a 17.5% invoice. To do this you must issue a special credit note giving credit for the extra 2.5% VAT, within 45 days of the rate change (By 14th February 2010). The original invoice should NOT be cancelled.

Example

Pete Ltd delivers one computer to a VAT registered customer and one to a non VAT registered customer on the 18th December 2009 - the VAT rate is 15% on this date.

On 2nd January 2010 Pete Ltd raises the VAT invoices in respect of these deliveries. Which VAT rate applies?

Using standard taxpoint rules, 17.5% rate should be used. However under the special rules Pete Ltd can charge the 15% rate which was in effect at the time of delivery. This would also reduce the amount of VAT Pete Ltd must account for on the sale.

The VAT registered customer is able to recover any VAT charged to them, so using the special rules will not save them any tax. It would make sense to just charge them the 17.5%.

The non VAT registered customer will probably be expecting to be charged VAT at 15% , so under the special rules you have the option to apply 15% VAT and keep them happy.

Supplies of services that are in progress on 1st January 2010

If a service starts before 1st January 2010 and is still in progress after that date. The normal rule is that where an invoice is issued or payment received after 1st January 2010 then VAT should be charged at the rate in effect at time of invoice ie. 17.5%, even if part of the supply was before that date. However, special rules also apply here in relation to continuous supplies of services (such as equipment leasing) and to single supplies of services

(such as training of staff), carried out over a period of time. We recommend a discussion with your accountant if this applies to you.

Payments in advance of 1st January 2010

Where payment is received before 1st January 2010 for goods and services supplied before that date then clearly the 15% VAT rate applies. Howerver, where the goods or services are not supplied until, on or after that date then special anti avoidance rules may apply to prevent artificial VAT savings. In this case a discussion with your accountant is recommended.

NOTE: This article has been prepared by the Angel Support team based on their opinions and interpretations of the VAT rules published by the HMRC and various industry papers. It does not constitute financial advice. We recommend that if you are unclear of your situation you should seek advice from your accountant.