The Chancellor announced today that the standard rate of VAT will increase to 20% on 4 January 2011. From this date;

• Individual consumers will see the price of standard rated goods and services increase
• Businesses or organisations in the exempt and non-business sectors will see a reduction in profits, as the irrecoverable VAT they suffer on standard rated goods and services will increase.
• Retail businesses could suffer administrative costs implementing price changes across product lines.
• Changes will need to be made to accounting systems to ensure that VAT is recorded correctly.

The following notes offer some practical guidance on the affect 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
• Changes to the Flat Rate Scheme
• Opportunities
• Anti-Forestalling Measures
• Change to VAT rate benefits those using Lennartz VAT Accounting

What VAT Rate applies?

Businesses 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 subject 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.

Businesses and 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

Businesses that need to calculate the VAT element of 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 a deposit at 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, the supplier has the option of applying the 20% rate of VAT.

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Construction contracts

The tax point for construction contracts (which can include 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 under a stage payment contract 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 actually 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

Businesses and organisations completing returns for a VAT return period including 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

Businesses and organisations will have to consider revising price lists, website 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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Changes to the Flat Rate Scheme

HMRC has published new output tax percentages for the flat rate scheme these should be applied from 4 January 2011.

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Opportunities

The VAT rate increase provides an opportunity for businesses to consider incurring costs earlier than planned to benefit from the 17.5% rate. This would be appropriate where goods or services are being supplied to anyone that cannot recover VAT. Equally, you could consider bringing forward tax points on any major expenditure to benefit from the lower rate (although see the legislation regarding 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.

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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