VAT’s UP Doc?
Christmas for the taxman is on January 1, 2010 when the VAT rate goes up from 15% to its original rate of 17.5%. Unfortunately, it becomes Groundhog Day for tax payers but don't worry as there are a few legal tricks of the trade that you can utilize to minimize the initial impact of the increase.
VAT is worked out at the rate applying when a tax point (TP) occurs. A TP is the date when the transaction becomes chargeable to VAT. There are three primary TPs but only two are relevant for this blog:
Basic Tax Point: This is the date when goods are supplied or services are performed. So whatever VAT rate applies on that date is the rate you use to calculate VAT.
Earlier Tax Point: This overrides the basic TP if payment has been received or the invoice has been issued before the goods are supplied. So if payment has been received in March for goods delivered in May, then VAT is chargeable at the rate applying during March.
TIP: Improve your cash flow by encouraging customers to pay early for post January 1 purchases. The advantage for them is that by doing so they will override the basic TP and can pay 15% rather than 17.5% VAT. To make this work, you must invoice them, or they must pay for the goods or services, by December 31 2009, even if the supply is made on or after January 1, 2010.
If the supply you make starts in December 2009 but ends in January 2010, for example a project management assignment, then the goods and services provided up to December 31, 2009 can be charged at 15% and thereafter at 17.5% VAT.
TIP: If you are sending a bill after December 31 relating to this overlap period, the elements relating to 15% & 17.5% VAT must be shown separately on the invoice.
A similar rule applies for continuous services, example bookkeeping. VAT is due when you raise an invoice or get paid, whichever is earlier (note: there are no basic TP for continuous services).
TIP: If your billing routine means that you issue an invoice January 31 2010 covering November 2009, December 2009 and January 2010, you can charge 15% VAT on the value of you supplies up to December 31 2009 and 17.5% on those made later.
Reference documents: Indicator; SI 1995/2518 reg. 90; VATA 1994 s.6
0113 815 1315
15 Queens Square, Leeds, LS2 8AJ