VAT is on the rise – don’t get caught out

By Luke Thomas, chartered certified accountant and Manager at Feist Hedgethorne

There are now only two months remaining before the standard rate of VAT climbs from 17.5 per cent to 20 per cent and we should all start planning for this now. The increase was announced in June's emergency Budget and means that any sales of standard-rated goods or services made on or after 4 January 2011 must carry a VAT charge of 20 per cent.

VAT registered businesses will need to apply the new 20 per cent charge for all bills raised on or after 4 January 2011.

There are, of course, issues over sales that span the change-over date and any business that has questions about the time of supply and the tax point for any VAT transaction should contact their accountants to make sure the relationship between the two is correct.

Those operating the Flat Rate Scheme will need to be aware of the new percentage rates that take effect as from 4 January 2011. Firms with a VAT-exclusive turnover of £150,000 can use the flat rate scheme. Since the threshold is VAT-exclusive, the new rate won't affect it. But firms with a VAT-inclusive turnover of £225,000 must leave the scheme. That threshold will change to £230,000 after 4 January in order to take the VAT increase into account.

Those operating the Cash Accounting Scheme will need to be able to identify payments received on or after 4 January 2011 that relate to supplies made before that date. VAT at a rate of 17.5 per cent will be due on these payments.

Price increases   

There is a relatively simple method for calculating the effect that the VAT lift will have on prices. This is to multiply old prices by 120/117.5. An item that costs £1000 is multiplied by 120 to give 120,000. It is then divided by 117.5 to produce the new price £1021.28. Businesses do not have to pass the increase on to customers but they will have to pay HM Revenue and Customs the additional VAT.

Anti-forestalling rules

The emergency Budget introduced 'anti-forestalling' rules which are intended to prevent businesses and customers taking unfair advantage of the change in VAT rate. In those instances where the rules apply, a supplier that has charged VAT at 17.5 per cent will be required to issue a supplementary invoice for an extra 2.5 per cent of VAT on 4 January.

The extra charge comes into effect when a customer is unable to reclaim the VAT charge and one or more of the following conditions apply: the supplier and customer are 'connected' - such as associated businesses - or the supplier funds the purchase - perhaps by lending the customer money - or a VAT invoice is issued but is not due to be paid for at least six months, or a pre-payment of above £100,000 is made before 4 January 2011 for goods or services to be delivered once the VAT increase has happened.

Tips on preparing for the change

It is important, to make sure that books are kept in good order, particularly for sales that span the transition period. Also ensure that any accounting software is updated to accommodate the new rate.

Retailers need to adapt their till systems so that the VAT increase is made automatic on or after 4 January 2011. Customers should be reminded that the change is coming into effect so that the increase in price does not come as an unpleasant surprise. Offering some examples of what invoices will look like after the change may be helpful.

If a business or anyone for that matter; is planning the purchase of a major item, then it might be advisable to buy before 4 January 2011. With this in mind, businesses and individuals wanting to save 2.5% VAT on their accountancy fees, should ensure they deliver their accounting and tax records to their accountants nice and early

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Luke Thomas is a chartered certified accountant and a Manager at Feist Hedgethorne, one of the leading firms of accountants in the Brighton area. Feist Hedgethorne deal with all aspects of accounting and taxation affairs of individuals and businesses from small sole traders to large companies that trade internationally. They specialise in a number of areas including, medical professions, professional practices and the creative industries.

To contact Luke call 01273 701200 or emailluket@feist-hedgethorne.co.uk

www.feist-hedgethorne.co.uk

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