2011 VAT Changes – a practical summary

The rate changes on Tuesday 4 January 2011 from 17.5% to 20%. The VAT fraction will change from 7/47 to 1/6. The way in which you complete a VAT return will not change nor will the quarter end.

The most frequent question being asked is “At what rate do I charge VAT for goods and services currently being processed?”

Obviously the supply takes place when goods are delivered or services performed. The tax point for VAT however may be different.

The actual tax point is when the invoice is issued if it is either before, or within 14 days after the supply. There can be exceptions though to the 14 day rule e.g. it can be 3 months for solicitors. Also, the actual tax point will be the payment date, if this is earlier than when the invoice is issued. There are also special rules that apply when there is a rate change and so the same supply could have different rates and to some extent you can choose. Complicated? You bet.

Examples:

• Goods delivered to customer on 28 December.
  If you invoice on 28 December 2010 the rate will be 17.5%. If you invoice on 5 January 2011, the rate will be 20% i.e. within 14 days of supply. If you invoice more than 14 days after 28 December the rate will be 17.5% (i.e. the date of supply).
• Invoice raised (or deposit paid) on 28 December by customer for goods to be delivered in January.
  17.5% will apply to the deposit and 20% will apply to the balance. You do have the option to charge 20% on the deposit which may simplify matters if your customer can recover the VAT.
• Issuing a credit note in January 2011 for item sold in December 2010.
  The same VAT rate should be used for the credit note as used on the original invoice. For this example it would be 17.5%
• Any services you provide can be split pre and post January even if you supply continuous services where usually, payment in advance triggers the tax point.

As with previous VAT rate changes, H M Revenue & Customs will be applying a relatively ‘light touch’. The amounts of money at stake during a changeover aren’t going to be life changing. Furthermore, to the extent that you supply other VAT registered businesses, any errors are ‘neutral’.

Our advice?

• Be sensible in your approach and don’t panic.
• Plan ahead to maintain your profit margins.
• Sort your software out – it’s easy enough with the likes of Sage.

In these strange times, you can always get some advice outside of your usual circle of advisers. Tony Cooney is a Chartered Tax Advisor and member of the Chartered Institute of Taxation. Ashworth Treasure is a practical firm, giving practical advice. Feel free to get in touch (tonycooney@ashworthtreasure.com) and we will come and see you for an informal chat to discuss your particular issues.