Professional briefing - The Journal Online

It is just a year since the
Government rushed
through, in a matter of
days, a reduction in the
VAT rate to 15%. We were told
that this would stimulate the
economy. Whether it did or not
is one for the political
commentators; but the 13 month
temporary reduction is now
almost at an end and we must
prepare ourselves for a return to
17.5% VAT on 1 January 2010.
The advantage this time is that
we have had time to prepare and
to look for the opportunities this
increase may present. The
disadvantage, apart from the
obvious extra 2.5% we will all
now pay, is that an increase
presents rather more pitfalls for
business than a reduction.
HMRC tell us they will take a
“light touch” to errors resulting
from the increase. We shall see…
What are the practicalities?
The first and most important
thing to remember is the tax
point rules, and that a tax point
is the date on which VAT is
calculated.
There are two tax points, the
basic tax point and the actual
tax point.
The basic tax point is created
when goods are delivered or
change hands and when a service
is performed. However, the basic
tax point is overridden by an
actual tax point, which happens
when money is received prior to
the basic tax point or when an
invoice is issued up to 14 days
after the basic tax point. In
simple terms, money comes first,
then the supply of goods or
services, and finally the invoice.
There is a concession at the time
of a rate increase which allows the
basic tax point to be used as the
relevant date if the issue of an
invoice would result in the higher
rate of VAT being charged.
Putting this into a practical
example, if I order a new car on
20 December but don’t take
delivery until New Year, when I
receive an invoice on the date of
www.lawscotjobs.co.uk
delivery, I will pay VAT at 17.5%.
If, however, I receive an invoice
before 31 December or pay
before that date, the VAT payable
will only be 15%.
If (unlikely I know) I take
delivery of my car on 31 December
but don’t receive an invoice or pay
any money until New Year, the car
dealer has the option to charge
17.5% based on the invoice date,
or 15% because I took delivery of
the car and so received the goods
when the VAT rate was 15%.
This presents some
opportunities for cashflow
boosting; but before we get to
that, back to a few practicalities.
Some businesses have pointed
out that a change of rate at a
minute past midnight on the
busiest night of the year is a
nonsense, and so the
Government has agreed a
concession for those retailers
operating point of sale retail
schemes who are open at
midnight on 31 December. For
them the VAT rate remains at
15% until the end of their 31
December trading session or at
6am on 1 January 2010,
whichever comes first.
The group facing some of the
trickiest of problems are those
businesses who make
continuous supplies of services,
and so issue applications for
payment rather than invoices.
This broadly encompasses
landlords, the construction
industry and professional
practices – lawyers and
accountants largely. For us, the
problem is that we have no basic
tax point and our application for
payment does not create any tax
point, so that, if we issue an
application at 15% but don’t get
paid until 2010 when our invoice
is generated by receipt of
payment, we have to account for
VAT at 17.5% and not the 15%
we requested from our client.
Where the timespan of the
service to which the invoice
relates is clear, such as a rent
invoice, we are allowed to
apportion the VAT between the
Although this may amount to
relatively little, with interest
rates being so low an invitation
to pay in advance is tempting
element of time at 15% and the
remainder at 17.5%, but for
most true continuous services,
this is difficult and time
consuming to establish and,
moreover, to prove.
Where’s the good news?
Simply, it’s all about cashflow and
using this as an opportunity to
give it a boost. Any private
individual or business that cannot
claim back all of the VAT it pays
out will want to avoid the extra
2.5% cost, and although this may
amount to relatively little, with
interest rates being so low an
invitation to pay in advance is
more tempting.
There is anti-forestalling
legislation to prevent serious
misuse of this opportunity, but
this only kicks in under specific
circumstances and if the
customer is unable to reclaim all
of the VAT charged. Where this is
the case, it’s still only an issue if
there is advance invoicing or
payment exceeding £100,000,
credit terms of more than six
months, connected parties, or
co-financing of the purchase.
Even then, a defence of normal
commercial practice could still
allow the transaction at 15%.
Where the anti-forestalling
legislation is breached, the 15%
VAT rate still applies to the pre-31
December tax point but an
additional 2.5% becomes
immediately payable on 1
January. Although I envisage the
imposition of this being limited,
the new penalty regime could
make this an expensive move and
I warn caution to anybody who
thinks they might be caught by
the anti-forestalling rules.
Finally, let’s look on the
bright side again and consider
that we may be only six months
or so away from another VAT
rate increase. Never mind the
extra cost that 20% VAT would
bring: after three rate changes
in about 18 months we will all
be experts.
Debra Dougal is a VAT partner at
Haslers, chartered accountants, Essex,
and a member of UK200Group Tax
Panel. e: debra.dougal@haslers.com
December 09 theJournal / 21