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VAT Rate Change What Goes Down Must Come Up

2 Dec 09 Everybody knows that the standard rate of VAT will increase from 15% to 17.5% on 1 January 2010. They also probably know that HM Revenue & Customs (HMRC) will allow some businesses open at midnight on New Year’s Eve, to apply the lower rate until closing time. Less widely known however, are the particular rules that apply to ongoing construction projects and other ‘continuous supplies of services’ and these are the focus of this briefing.More....

Everybody knows that the standard rate of VAT will increase from 15% to 17.5% on 1 January 2010. They also probably know that HM Revenue & Customs (HMRC) will allow some businesses open at midnight on New Year’s Eve, to apply the lower rate until closing time. Less widely known, however, are the particular rules that apply to ongoing construction projects and other ‘continuous supplies of services’ and these are the focus of this briefing. The basic rule is that the 17.5% rate will apply to all VAT invoices issued on or after 1 January 2010 and which are issued within 14 days of providing the goods or services (or any longer period for invoicing agreed with HMRC).

There are, however, special rules for supplies which span the change of rate and for businesses that make continuous supplies of goods or services. Under these rules if goods are supplied or services performed before 1 January 2010 and a VAT invoice is raised after that date, VAT can be accounted for at 15%.

The special ‘change of rate’ rules are optional and do not have to be applied. Where a client can recover all the VAT charged to them, there will be little or no benefit. Where the client can only recover part or none of the VAT, then it will be important to minimise the liability. Clients that will fall into this category will include those in the finance, insurance, healthcare and education sectors, as well as government departments and charities.

Applying the rate change to typical construction contracts
Under a typical construction contract which involves making monthly stage payments, the tax point or time of supply is normally the date the contractor issues a VAT invoice or receives a payment, whichever happens first.

Work completed before 1 January 2010
Under the normal rules, VAT invoices issued and payments received on or after 1 January 2010 will be liable at 17.5%, including retention or final account payments. If they relate to work completed before 1 January, the special change of rate rules can be used to apply the 15% rate.

Work in progress on 1 January 2010
Where a project is ongoing under a stage payment contract on 1 January 2010, any VAT invoices issued or payments received on, or after that date will be liable to VAT at 17.5%. The special change of rate rules can be applied if a VAT invoice, or a payment (including retention or final account payments) covers work actually performed up to 31 December 2009.

Where necessary the amount involved should be apportioned (based on measurable work or normal
costing or pricing structures) and the VAT calculated at 15% on the element of the work performed before 1 January. The calculation must be demonstrably fair and reasonable; given that the construction industry usually shuts down for two weeks at the end of the year, a straight line time apportionment will obviously not be appropriate.

Other construction contracts
If a contract, say for demolition works, only involves a single payment (excluding any agreed retention), perhaps when the work has been completed or is nearing completion, the normal tax point rules apply, including a basic tax point when the work is completed.

Work completed before 1 January 2010
Under the normal rules a VAT invoice issued on or after 1 January 2010 creates a tax point for work that was completed beforehand and will be liable to VAT at 17.5%. The same applies to any retention payment received on or after 1 January 2010. The special change of rate rules can be used to apply the 15% rate.

Work in progress on 1 January 2010
Tax points that occur on or after 1 January 2010 for work in progress on that date will be liable at 17.5%. The special change of rate rules can be used to apply the 15% rate to work actually performed before 1 January 2010.

So, if a VAT invoice is issued, or payment received on or after 1 January 2010 for work that was in progress while the 15% rate applied, the amount involved may again be apportioned and VAT calculated at 15% on the element of the work performed before 1 January.

Anti avoidance
The normal rule for deposits and prepayments is that VAT should be accounted for at the rate in force when it is received. If a deposit is received before 1 January 2010 for goods or services that will be supplied on or after that date, the 15% rate of VAT will apply to the deposit and 17.5% will apply to the balance.

Related Information

Legislation has been introduced to prevent avoidance where arrangements are made to account for VAT at 15% in advance of 1 January 2010, in respect of goods or services to be provided afterwards.
The legislation will only apply to certain transactions where the person incurring the VAT liability cannot recover all the VAT and one of the conditions listed below applies. Where the transaction is caught by these rules, a supplementary VAT charge of 2.5% will apply.

• A prepayment from, or the issue in advance of VAT invoices to a connected person for future supplies.

Or

• Funding is provided or arranged for customers to enable them to pay in advance for goods or
services to be supplied by the same person; or

• The issue of VAT invoices that do not have to be paid for at least six months;

or

• Pre-payments are received, or advance VAT invoices issued in excess of £100,000 and this is
not normal commercial practice.

Some clients who cannot recover any VAT may be interested in the possibility of making a maximum
advance payment of £100,000 to realise a saving £2,500, but the commercial risk and legal and other
costs that must be taken into consideration will probably far outweigh the benefit.

Whilst every effort has been made to ensure accuracy, information contained in this case study may not be comprehensive and recipients should not act upon it without seeking professional advice. http://bankingtaxfinance.davislangdon.com

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