VAT rises but zero rates preserved

As expected, the Chancellor today announced that the standard rate of VAT is to go up to 20% from 4 January 2011. Contrary to some forecasts, there was no change to zero-rated, exempt or reduced rate supplies and the Chancellor pledged in his speech to retain existing zero rates on food, childrens clothes, newspapers, etc for the duration of this Parliament.

To effect the VAT rate change there will be transitional provisions (including anti-forestalling legislation) similar to those for the reversion to the 17.5% rate following the temporary decrease to 15% in the last Parliament.

When does this change take effect?

Suppliers will need to prepare for the change of rate - The following rules apply.

The basic position is that the time of receipt of goods by the customer or performance of services (the “basic tax point”) will determine which rate should apply. However, subject to the anti-forestalling rules, the tax point may be brought forward where a VAT invoice is issued or payment made prior to the provision of goods or services.

Applying the normal rules, businesses may rely on the following to determine which VAT rate to charge: * Retail businesses that do not raise VAT invoices (making mainly cash sales to non-business customers) should use the 20% rate for all takings received on or after 4 January 2011, except if the customer pays on or after 4 January for something it received before 4 January 2011. * Businesses that sell mainly to other VAT-registered persons should use the 20% rate for all their VAT invoices issued on or after 4 January 2011 and within 14 days of the supply.

However, for sales that span the change in rate there will be special rules that allow suppliers to choose the rate to be applied.

The special rules

Where the basic tax point for a supply is before 4 January 2011 but the supplier raises an invoice or receives payment on or after that date, that supplier may apply the 17.5% or the 20% rate. Similarly, where a payment is received or an invoice issued prior to 4 January 2011, but the basic tax point is on or after that date, the supplier may elect to account for VAT at 20%, even though under the normal rules the 17.5% rate would apply. Obviously it will be important for the supplier to consider the VAT position of his customers in deciding whether or not to elect.

In the case of continuous supplies or single supplies that span the 4 January 2011 an apportionment may be made so that supplies made prior to 4 January 2011 attract VAT at the rate of 17.5% and those on or after that date at 20%.

The anti-forestalling legislation

Anti-avoidance rules will restrict the continuing application of the 17.5% rate of VAT after 4 January 2011 and have effect for transactions entered into on or after 22 June 2010. They will affect supplies actually made on or after 4 January 2011 to customers who are unable to recover all the VAT where payment is received or a VAT invoice issued before then and one of the following conditions is met:

•The supply is made directly or indirectly to a connected person; or
•The supplier provides or arranges funding of its customer’s payment; or
•A VAT invoice is issued that does not have to be paid in full within six months; or
•The payment or VAT invoice is in excess of £100,000 (including any other supplies made as part of the same scheme or arrangements), and this is not normal commercial practice.

The legislation may also apply if, before 4 January 2011, there are supplied rights or options to receive goods and services on or after that date, free of charge or at a discount.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com.