The Chancellor has announced that the standard rate of VAT will increase to 20% on 4 January 2011.

Information produced by the Charity Tax Group shows that charities will now face an annual irrecoverable VAT bill of at least £1.1bn (possibly as much as £1.5bn), with smaller charities paying about 4.4 per cent of their total income in irrecoverable VAT.

Stephen Bubb, chief executive of Acevo, said: "At a time when the government wants more services to be delivered by third sector organisations and to encourage the growth of a big society, charities are being walloped with a big rise in VAT that puts them at a massive competitive disadvantage when bidding to deliver new services."

John Low, chief executive of the Charities Aid Foundation, said the move would have a severe impact on charities. "It is the smaller charities that are disproportionately affected because VAT accounts for more of their charitable expenditure than it does for larger charities," he said.

Martin Sime, chief executive of the Scottish Council for Voluntary Organisations, said the rise would hit voluntary sector organisations in Scotland hard, raising their VAT bill by £14m.

The following notes offer some practical guidance on the effect of the change.

• What VAT Rate applies
• Options for Supplies spanning the changes of rate
• Credit Notes
• VAT Fraction
• Deposits received before 4 January 2011
• Construction contracts
• VAT on expenses and overheads
• Stock on hand on 4 January 2011
• VAT returns
• Quotes, contracts and price lists
• Opportunities
• Anti-Forestalling Measures
• Change to VAT rate benefits those using Lennartz VAT Accounting

What VAT Rate applies?

Charities accounting for VAT on an invoice basis should apply the rate of VAT in force at the time they issue (or are obliged to issue) a VAT invoice. Invoices issued before 4 January 2011 will be liable to VAT at 17.5% and invoices issued on or after 4 January 2011 will be liable to VAT at 20%. It is important that tax point rules are recognised as well as the requirement to issue an invoice within 14 days as both will impact on the rate of VAT.

Organisations that use the cash accounting scheme are not liable for VAT on their supplies until they receive payment.

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Options for Supplies spanning the change of rate

Where supplies span the change of rate you have a choice of VAT rates. Where a payment is received or an invoice is issued before 4 January 2011 for goods or services that are provided after 4 January 2011, you can,

- Charge VAT at 17.5%; or
- Account for VAT at the new rate of 20% on the amounts received or invoiced.

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Credit Notes

VAT credit notes or debit notes that contain a VAT adjustment must show the VAT rate in force at the time the original invoice was issued.

Accounting systems must be capable of referring to the VAT rate applied on the original invoice.

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VAT Fraction

Charities that need to calculate the VAT element from cash received should use the new VAT fraction of 1/6 to confirm the value of VAT at the 20% rate.

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Deposits received before 4 January 2011

VAT should be accounted for on deposits using the rate in force when it is received. If a deposit is received before 4 January 2011 for goods or services that will be supplied after the rate change, you have the option of applying the 20% rate of VAT.

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Construction contracts

The tax point for construction contracts (which includes design, advisory and supervisory services) is the earlier of, the time an invoice is issued or a payment is received. If you are carrying out work on 4 January 2011, any VAT invoices issued or payments received on or after that date will be liable to VAT at 20%. This applies even if some of the work was performed before 4 January.

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VAT on expenses & overheads

Computerised accounting systems should be revised to record the new standard VAT rate from 4 January 2011.

This may require the introduction of a new tax code so that the system can process invoices showing the 17.5% rate and the 20% VAT rate. Consideration should also be given to the coding of services received from abroad that are subject to the reverse charge.

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Stock on hand at 4 January 2011

VAT at the 20% rate should be applied to stock sold after 4 January 2011 even when 17.5% VAT was incurred on the purchase.

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VAT returns

Organisations completing VAT returns for a period that includes 4 January 2011 will have to account for VAT inputs and outputs at both the 17.5% and the new 20% rate.

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Quotes, contracts and price lists

Charities will have to consider revising price lists, web site information, publications and quotes or contracts that have been issued in advance of the VAT rate change.

Existing contracts may also need to be adjusted to correspond with VAT invoices and accounting procedures and to ensure that the reduced rate is recorded correctly.

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Opportunities

The VAT rate increase provides an opportunity to make a saving by incurring costs earlier and benefiting from the 17.5% rate. This may be appropriate for larger items of expenditure, however, see the notes below on anti-forestalling measures.

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Anti-Forestalling Measures

Measures have been introduced to prevent artificial structures that are designed to reduce the VAT charged on supplies of goods and services. Genuine commercial transactions should not be affected but large scale advance payments are likely to be the target of these measures.

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Change to VAT for those using Lennartz VAT Accounting

As the VAT rate will be increased output tax charges under Lennartz could increase. This could result in additional VAT costs for anyone that has used the Lennartz procedures.

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This bulletin was prepared by the VAT Team at Scott-Moncrieff - Scotland’s leading charity advisors.

Please feel free to contact the Scott Moncrieff VAT Team if you would like to discuss these or any other VAT issues:

Edinburgh

Scott Craig: scott.craig@scott-moncrieff.com
Alan Glen: alan.glen@scott-moncrieff.com
Iain Masterton: iain.masterton@scott-moncrieff.com

Tel: 0131 473 3500

Glasgow

Greg McNally: greg.mcnally@scott-moncrieff.com
Anthony Cochrane: anthony.cochrane@scott-moncrieff.com

Tel: 0141 567 4500

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