The advantage this time is that we have had time to prepare and 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. Hmmm…
So, what are the practicalities of an increasing VAT rate?
Well, 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/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 the New Year, when I receive an invoice on the date of 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 the 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 have 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 amongst the trickiest of problems and, I might add, closest to my heart 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. The problem for this group is that they have no basic tax point and their application for payment does not create any tax point so that, if they issue an application at 15% but don’t get paid until 2010 when their invoice is generated by receipt of payment, they have to account for VAT at 17.5% and not the 15% they requested from their client. Where the timespan of the service to which the invoice relates is clear, such as a rent invoice, they are allowed to apportion the VAT between the 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.
So, where’s this good news I keep promising?
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, interest rates being so low make the invitation to advance pay 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
VAT Partner – Haslers
