HAPPY NEW YEAR TO ONE AND ALL!

With effect from today, 4th January 2011, the standard rate of VAT has increased to 20%. Most of you will be familiar with the steps you require to undertake to deal with a change in the standard rate of VAT for your business, as they are effectively identical to when the rate increased from 15% to 17.5% last January. However, to recap:-

• FOR BUSINESSES ACCOUNTING FOR VAT ON THE DATE OF THEIR INVOICES

VAT is calculated at the rate in force on the date an invoice is raised. If full or part payment is received prior to an invoice being raised, VAT applies at the rate in force on the date of any prepayment and on the amount actually paid.

• FOR BUSINESSES ON CASH ACCOUNTING

VAT applies at the rate in force on the date of payment, however when a business using Cash Accounting has made a supply, delivery or supplied goods or services prior to the VAT increase and payment is received after the VAT rate has changed, then VAT may be accounted for at the old rate.

• FOR BUSINESSES USING A FLAT RATE SCHEME

New percentages apply from 4th January 2011 onwards, which can be found on the following link:-

http://www.hmrc.gov.uk/vat/start/schemes/flat-rate.htm#5a

• FOR BUSINESSES MAKING A CONTINUOUS SUPPLY OF SERVICES

Where interim payments may be received from time to time, a tax point is reached whenever a tax invoice is issued or a payment is received, whichever happens first. Again, VAT is due at the rate in force at the time.

• SPECIAL CHANGE OF RATE PROVISIONS

As the standard rate is increasing from 17.5% to 20%, HMRC are aware of the potential for businesses to artificially manipulate payment and tax point dates to obtain an advantage from the lower tax rate. In order to counter this, they have implemented ‘anti forestalling’ legislation.

The legislation applied by introducing a supplementary charge to VAT (2.5%) on the supply of goods or services where the customer cannot recover all of the VAT on the supply and one of the following conditions is met:-

• The supplier and customer are connected parties; or
• The supplier funds the purchase of the goods or services; or
• A VAT invoice is issued by the supplier where payment is not due for more than 6 months.

It will also be applied in circumstances where a prepayment in excess of £100,000 is made before the rate rise in respect of goods and services to be provided on or after the date of the rate rise, although it will not apply if the prepayment is in accordance with normal commercial practice.

• VAT FRACTION

For situations where VAT is calculated on a VAT inclusive basis, the VAT fraction is now 1/6th, instead of the previously used 7/47ths

IN SUMMARY:-

1.     Reset your accounting system to take account of the     change to standard rate VAT, after you have ensured all pre-change of rate accounting information has been correctly recorded.

2.     Remember, the change in rate does not apply to any zero-rated, reduced rate or exempt supplies. These should continue to be accounted for as normal.

Further detailed guidance on the impact of the changes to standard rate VAT can be found at www.hmrc.gov.uk. If you have any specific queries, then please get in touch with your usual EQ contacts, who will be happy to advise.

EQ Chartered Accountants has prepared this information as a service to clients. We recommend that professional advice is sought before taking action and we cannot accept any liability for actions taken or not taken as a result of the information given.