PostHeaderIcon VAT standard rate 17.5%

From 1 January 2010 the standard rate of VAT will return to 17.5%.

Any VAT registered business should charge VAT at the rate of 17.5% on any sales of standard rated goods or services that it makes on or after 1 January 2010.

I. VAT invoices.

When you have to issue VAT invoices you should use the 17.5% rate for all VAT invoices that you issue on or after 1 January 2010 and which are issued within 14 days of you providing the goods or services.

However (there are optional special rules for supplies) – if you provide goods or perform services before 1 January 2010 and raise a VAT invoice after that date, you can, if you wish, apply the 15% rate.

Example

A company delivers goods to a customer on 27 December 2009 when the VAT rate is 15%. On 5 January 2010 the company issues a VAT invoice in respect of the sale. What rate of VAT does the company charge?

The company charges the 17.5 % rate of VAT or may decide (under the special rules) to charge the 15% rate of VAT, which is in effect when goods were delivered.

II. Cash sales.

When you are a retail business making mainly cash sales to non business customers (e.g. a restaurant, a shop) and do not have to raise VAT invoices you should use the 17.5% rate for all takings that you may receive on or after 1 January 2010.

However – if your customer pays for something they took away before 1 January 2010, your sale took place before 1 January 2010 and you must use the 15% rate.

III. A deposit or pre-payment.

When you receive a deposit or pre-payment before 1 January 2010 for goods or services that you will supply on or after that date the 15% rate of VAT will apply to the deposit and 17.5% will apply to the balance.

Example

A company receives a deposit of £120 on 22 December 2009 for tables that retails for £800 gross. The balance of £680 gross is paid when the tables are delivered on 8 January 2010. What rate of VAT is due?

  • The deposit is received before 1 January 2010 so VAT of 15% is due.

£120 x 3/23 = £15.65 - VAT amount

(£104.35 net + £15.65 VAT = £120 gross)

  • The balance is received after 1 January 2010 so VAT of 17.5% is due.

£680 x 7/47 = £101.28 - VAT amount

(£578.72 net + £101.28 VAT = £680 gross)

  • Total received:

£683.07 net + £116.93 VAT = £800 gross

If a customer pays in full for the tables on 22 December 2009, which are delivered on 8 January 2010 – VAT of 15% is due:

  • £800 x 3/23 = £104.35 VAT amount

£695.65 net + £104.35 VAT = £800 gross

 

IV. Supplies in progress.

If supplies are in progress on 1 January 2010 (a service commences before 1 January 2010 and is still in progress after that date) – the normal rule is that where an invoice is issued or a payment received after 1 January 2010 VAT is due at 17.5% even if part of the supply was undertaken before that date.

However – the special rules also apply here in relation to continuous supplies of services and to single supplies of services carried out over a period of time.

If you make a continuous supply of goods (gas, electricity or water liable at the standard rate) or services (e.g. leasing equipment) you may account for VAT at the 15% rate on that part of the supply made before 1 January 2010.

Example

A company leases computer equipment to a local dental practice for £120 per month plus VAT. The company invoices quarterly in arrears. What VAT does the company charge for the quarter covering 1 November 2009 to 31 January 2010?

Because the invoice is issued after 1 January 2010 the normal rule is that the entire £360 fee is liable to VAT at 17.5%. However, the company, may charge VAT at 15% on the payment for November and December 2009.

If you make a single supply of a service which is nevertheless carried out over a period which commences before 1 January 2010 but is not completed until after that date (e.g. decorating a house) you may if you wish, charge VAT at 15% on the work done up to 31 December 2009 and 17.5% on the remainder.

Example

A Plumber has been employed to carry out some major works to a house for a private customer. The work commenced in early December 2009 and won’t finish until mid January 2010. How does the plumber calculate the VAT?

The plumber may account for VAT at 15% on the work carried out before 1 January 2010 and 17.5% on the remainder. The plumber will need to be able to show that his calculation is accurate – perhaps he charges a daily or an hourly rate that he could use to demonstrate this.

V. Cash accounting scheme.

While the cash accounting scheme allows you to account for your VAT liability when you receive payment it does not affect the tax point. The tax point is the time that the sale is made under the law and it determines the rate of tax applicable.

This means that VAT will be due at 15% on supplies you made before 1 January 2010, even if you receive payment on or after that date. When you receive payments in the months after the rate change, you will need to identify those payments which relate to supplies made before 1 January 2010 on which VAT is still due at the previous 15% rate.

The same applies to purchases that you make before 1 January 2010. You may only reclaim VAT of 15% on these, even if you pay for them on or after 1 January 2010.

VI. Flat rate scheme.

When the standard rate returns to 17.5%, flat rates will broadly return to their November 2008 levels. However, in accordance with HMRC’s responsibility to review the rates to ensure that they accurately reflect the VAT paid by businesses in each sector, further adjustments may be necessary. The new flat rates will be finalized and published later in 2009.

VII. Anti-forestalling legislation

Legislation has been introduced to prevent avoidance (forestalling) where arrangements are made to account for VAT at 15% in advance of 1 January 2010 in respect of goods or services to be provided afterwards. The legislation will only apply to certain transactions and is unlikely to affect you unless:

  • you receive prepayments from persons connected to you for future supplies; or

  • you issue advance VAT invoices to persons connected to you for future supplies; or

  • you provide or arrange funding for your customers to enable them to pay in advance for goods or services to be supplied by you; or

  • you issue VAT invoices that do not have to be paid for at least six months; or

  • you receive pre-payments or issue advance VAT invoices in excess of £100,000 and this is not normal commercial practice; or

  • you supply rights or options to receive goods and services from you free of charge or at a discount.

 

Find out more: http://www.hmrc.gov.uk/vat/forms-rates/rates/rate-changes.htm

 

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