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Solicitors Update - VAT rate change

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					Solicitors Update - VAT rate change


Happy New Year

Accounting for the VAT rate on 1 January 2010

The temporary reduction in the VAT rate from 17.5% to 15% expires as Big Ben signifies the start of the New
Year, although hopefully it will not be the uppermost thing on your mind at that moment. Firms do however
need to ensure that they understand the implications for themselves and their customers.

The fact that the rate reverts to 17.5% means that, in simple terms, VAT must be accounted for at the higher
rate on services supplied in the next year. The most straightforward way to deal with the change in rate is to
simply treat all bills issued before 1 January 2010 as including VAT at 15% and all those issued subsequently
as including VAT at 17.5%.

However, there are two key areas that for many firms it is worth considering in more detail in this regard:

   •   How should supplies that straddle the year end be treated; and
   •   Is there any way to apply the 15% rate to supplies made after the year end?


Supplies that straddle the year end

For supplies that straddle the year end VAT should, by default, be accounted for at the rate applicable when
the bill is raised. However the firm can, if it wishes, apply the lower rate to the value of the work that was
carried out between 1 December 2008 and 31 December 2009, and the higher rate on the value of the work
before or after that period. If the bill is issued in December 2009 then the 15% rate can be applied to the
whole bill regardless of when the work was carried out.

The split of the value of the work must be made on a just and reasonable basis, which would usually be by
the time recorded and the time of incurring external costs and disbursements (where these are not
disbursements in the technical VAT sense). For external costs and disbursements that are recharged to
clients, the rate of VAT applied would be the same rate as was charged to the firm.

As a consequence of this, if a bill is issued in January for work performed entirely in that 13 month period
then it can all be invoiced at 15%. This will be of benefit to clients who are either private individuals or
businesses that cannot recover all of their purchase VAT, and will be particularly relevant for personal injury
and Legal Aid work that is completed before the year end but where fee negotiations continue into 2010.

Additionally, if an advance payment is received prior to the end of the year for services that are to be
supplied in the New Year then VAT should be accounted for at 15% on the amount of the payment. This
would apply to surplus receipts under Legal Services Commission standard block contracts that are
attributed to particular cases at 31 December 2009.
Can the 15% rate be applied to services made after the year end?

It may not be obvious, but the answer to this question is yes – at least in certain circumstances. Once again,
this may benefit the client where they are unable to reclaim the VAT, either because they are not in business
or do not fully recover the VAT on their purchases.

One of these has already been mentioned – where a client makes an advance payment prior to the end of
the year.

Another is issuing bills in advance of the work being performed. Both of these measures, especially the first
one, have the benefit to the firm of bringing cash in earlier than might otherwise occur, and both should be
accounted for at the lower VAT rate.

There are some special rules to prevent these opportunities being exploited on a large scale, but these only
apply where one of the following applies:

   •   The client is connected to the firm
   •   The net bill value exceeds £100,000
   •   Extended payment terms are offered beyond 6 months, or
   •   The firm arranges funding to enable the client to pay in advance


Practical matters

Clearly all of these exceptions to the norm require additional care in ensuring that VAT is accounted for at the
appropriate rate.

Billing early and encouraging advance payments from clients have clear advantages for the firm as well as
potentially saving the client an effective 2.1% of the fee.

It may be possible to save clients money by charging the lower rate on the part of services that are
performed before the year end. However, some firms’ systems may not be able to issue bills with two
different standard rates of VAT on the same bill.

It is also important to ensure that purchase invoices received in January are entered at the rate of VAT
shown on the invoice – some systems may require the same standard rate to be applied to all invoices.

It is therefore advisable for firms to ensure that they know the capabilities of their software prior to the year
end, so that they can decide the best way that they can deal with work straddling the year end for themselves
and their clients. The alternative is frantically trying to work it out on 2 January, bringing you quickly down to
earth with a bump in the New Year.

If you would like any further information, please contact Andy Poole at Hawsons on 0114 266 7141.

Hawsons Chartered Accountants
Pegasus House, 463a Glossop Road, Sheffield, S10 2QD
T: 0114 266 7141 F: 0114 266 1456 E: aap@hawsons.co.uk W: www.hawsons.co.uk/solicitors

Also at Doncaster and Northampton

				
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