This Content Was Last Updated on February 9, 2017 by Jessica Garbett
Here are some practical thoughts about the imminent VAT rise:
~ Applies from 4 January 2011. Main rate to 20%
~ Flat rate users need to adopt new flat rate bands, see HMRC BN45
~ Check your software now
What about supplies straddling the date of change:
~ Basic rule is that VAT is due based on the rate at the taxpoint date. Taxpoints are complex, but can be simplified to:
– Cash sales (retail businesses) – date of supply
– Account sales – date of invoice or date of payment, which ever is earlier (which means that if you invoice on 5 January for work done on or before the 4 January, then in theory the new rate applies – unless you were paid on or before the 5th and are raising the invoice late)
~ However HMRC allow some flexibility when VAT rates change. Broadly you can use the VAT rate in place at the time of supply, even if under tax point rules the VAT rate would be different
– more on rules for when vat rates change are here and here
~ If you are on cash accounting, then you need to identify money coming in after 4 January that relates to supplies on or before 3 January, and apply the old lower rate to these.
~ Where a supple straddles the vat rate change, eg a week long contract / billing period over 1-7 January, you can apportion the VAT charge so long as you are reasonable
Anti Forestalling:
~ Anti forestalling is a set of rules to prevent abuses when rates rise.
~ Applies if one of the following conditions are met:
– supplier and customer are connected
– supplies exceed £100,000
– the supplier arranges advance funding
– a VAT invoice is issued but not due for payment for more than six months
– in these circumstances, where VAT is charged at 17.5% a 2.5% surcharge applies
– more information
Planning and opportunities:
~ With the rise in the VAT rate its time to revist some VAT strategies.
~ If your business mainly deals with retail customers or non vat registered businesses, then its best to defer registration as long as possible. If you are VAT registered and your turnover is below the de-registration threshold you may be best off de-registering.
~ If your business mainly deals with other non vat registered businesses then its best to register as early as possible, even if you are below the VAT threshold.
~ The current registration threshold is £70,000. The current de-registration threshold is £68,000.
~ If you supply goods on credit, then its likely the Cash Accounting scheme will be a better option for you as it defers paying VAT until you are paid and gives you automatic bad debt relief. You can use cash accounting if your turnover is less than £1.3m
~ If you mainly supply goods retail, then standard VAT is likely to be best for you instead of cash accounting as it means you can advance the vat recovery on expenses.
~ Some smaller businesses will be better off under the flat rate scheme. With this scheme you still charge your customers the normal 17.5% / 20% VAT, but you only pay part of this to HMRC and keep some of it in lieu of claiming VAT on expenses. You need to do the maths (or ask us to) to see if it works for you – the rates are here. Broadly you can enter the scheme if your turnover is less than £150,000, and you need to leave it if your turnover rises to over £230,000 (4 January onward).
~ If you have a retail type business which cannot pass VAT rises on to customers, then there may be merit in splitting your business in such away that you have two smaller businesses with one or both under the VAT limit. NB – this is not easy to achieve, and the devil is in the detail. There are pitfalls for not executing arrangements properly – you must take professional advise before you do this.