Docstoc

VAT Guidance Note -

Document Sample
VAT Guidance Note - Powered By Docstoc
					ae73d712-3c3a-47a7-babc-857735fd262a.doc




VAT Guidance Note -


Change to the Standard Rate of VAT from 1st January 2010

Despite lobbying by various bodies for a delay, the standard rate of VAT will revert back
to 17.5% with effect from 1st January 2010. This rate should then be applied to all cash
sales e.g. in respect of catering and car parking income and all VAT invoices issued from
this date, so long as the invoices are issued within 14 days of the supply being made.

However, you may remember from the guidance issued when the standard rate was
temporarily reduced to 15% with effect from 1st December 2008, that special rules can be
used when supplies span a change of rate. If goods are provided or services performed
before 1st January 2010, but a VAT invoice is raised after that date, suppliers can choose
to charge VAT at 15% using the special change of rate provisions. Using these provisions
is, however, optional for suppliers, so University purchasing units should request that
suppliers use them where it will result in a saving to the University. Suppliers could, of
course, be encouraged to invoice before 1st January‟10 to ensure VAT is charged at 15%
so long as the goods or services will be received by 31st December‟09. Where a supplier
issues an invoice at 17.5% but subsequently agrees to reduce it to 15% by applying the
special change of rate provisions, a credit note for the 2.5% VAT overcharged must be
issued by 14th February 2010. Where the University is the supplier, the special change of
rate rules should only be applied for standard rated sales where VAT will ultimately be a
cost to the customer e.g. another UK University, a professional association or charity.

The following notes are intended to provide practical guidance on how the change of rate
should be implemented. Unfortunately, some fairly complex areas of VAT legislation are
involved and details of the various VAT anti-avoidance measures that have been
introduced are also included. If you have a query concerning this guidance or require
advice on a transaction not specifically covered below, then please contact the VAT
Section of the Finance Directorate:-

James Gillen, Senior VAT Assistant - tel. 0161 275 2165 or
e-mail james.gillen@manchester.ac.uk


Tax Points

The „tax point‟ is the time that a sale is made under the law and it determines the rate of
tax applicable when a change of rate occurs.

The tax point/time of supply rules are used to decide when a supply takes place and
therefore, when VAT should be accounted for.



                                              1
ae73d712-3c3a-47a7-babc-857735fd262a.doc




Usual Tax Point Rules

a.) Basic tax points
The basic tax point for goods is the date when they are sent to the customer or the
customer takes them away
The basic tax point for services is the date when the service is performed; normally the
date when all work except invoicing is completed

A basic tax point is overridden, however, if an actual tax point is created

b.) Actual tax point

An actual tax point is created if you either:

- issue a VAT invoice or receive a payment before the basic tax point, then the tax point
is the earlier of the date you issue the invoice or receive the payment

- issue a VAT invoice up to 14 days after the basic tax point, the date when you issue the
invoice becomes the tax point.

 N.B. If a VAT invoice has already been issued for a part payment or a payment received
before the basic tax point, this will have created a tax point for the amount invoiced or
received.

c.) Other tax points

Some types of supply or category of supplier have different tax point rules. Often this
means that a tax point is only created when a VAT invoice is issued or a payment
received, whichever is the earlier. This most commonly applies to:

        continuous supplies of services
        supplies of water (but not bottled water) and mains supplies of gas and electricity
        construction services where stage payments are made
        royalties
        the letting of property on short or long term leases, and
        services provided by barristers and advocates.

Applying the tax point rules on 1st January 2010
When a tax point occurs before 1st January 2010, the supply, or the part of it covered by
the tax point, will remain liable to VAT at 15%. Tax points occurring on or after 1 st
January 2010 will be liable to VAT at 17.5%. Whilst some supplies will have a single tax
point e.g. a retail sale, others may have two or more tax points e.g. receipt of a deposit for



                                                2
ae73d712-3c3a-47a7-babc-857735fd262a.doc




goods to be delivered later. A deposit received before 1 st January 2010 will be liable to
VAT at 15% unless:

    -    the special change of rate rules are applied by the supplier which increases this to
         17.5%, or

    -    the anti-forestalling legislation applies

If, however, the goods are not delivered and the balance of the price is not invoiced or
paid for until on or after 1st January 2010, the 17.5% rate will apply to the remaining
VAT due.

Later in this document (see page 8 - Treatment of Specific Transactions) you will find
examples of how various transactions which take place around the time of the rate change
should be treated. Please note, however, that anti-forestalling legislation has been
introduced in order to restrict the extent to which customers receiving supplies of goods
or services after 1st January 2010, can take advantage of the lower rate in force prior to
that date.

Anti-Forestalling Legislation

This prevents VAT avoidance (forestalling) where artificial arrangements are made to
account for VAT at 15% in advance of the rate change for goods or services that will be
provided afterwards. The legislation applies only where the customer cannot fully recover
the VAT charged on a particular supply on his VAT Return. Whilst most University
purchases fall into this category, HMRC state that genuine commercial transactions
should not be affected by the anti-forestalling legislation.

The legislation applies to particular transactions and Customs have advised that it will not
affect businesses unless:

        Prepayments for future supplies are received from connected persons e.g.
         companies in a corporate group (Section 839 of the Income and Corporation
         Taxes Act 1988 applies)

         N.B. The ‘connected party test’ also applies where a series of supplies of the
         same goods or services take place and any of the suppliers are connected to
         the eventual customer or

        VAT invoices are issued in advance to connected persons for future supplies
         or

        Suppliers provide or arrange funding enabling their customers to pay
         in advance for goods or services to be supplied by the supplier or




                                                3
ae73d712-3c3a-47a7-babc-857735fd262a.doc




        Suppliers raise VAT invoices that do not have to be paid in full within six
         months of the invoice date or

        Suppliers receive pre-payments, or issue advance VAT invoices, in excess of
         £100,000, where this is not normal commercial practice. N.B. This also
         applies to schemes involving a series of transactions to the same customer
         which aggregated together exceed £100,000 or

        Suppliers supply the grant of a right or option to a customer before 1st
         January 2010, which allows them to receive goods and services after that
         date free of charge or at a discount, when the grantor and customer are
         connected parties, or a person connected to the supplier finances the
         customer’s payment, or the consideration for the grant of the right and any
         related supply of goods or services amounts to more than £100,000.

         N.B. May not apply if ‘normal commercial practice’ can be claimed so long
         as the supply is not between connected persons

Listed Supplies

The legislation makes special provision for “listed” supplies for which the basic time of
supply occurs at the end of the period to which an invoice or payment relates e.g. supplies
of heat or power. Listed supplies will be caught by the measures if a payment is received
or a VAT invoice issued before 1 st January 2010 which covers a period ending on or after
that date, if any of the bullet points above apply. N.B. If the period covered by the VAT
invoice (or payment) includes more than one billing period, the consideration must be
apportioned so that no supplementary charge arises in respect of supplies provided in
billing periods which ended before 1st January 2010.

Listed supplies include:-

        a supply of services

        a supply arising from the grant of a major interest in land; basically rentals under
         a long lease, but see below for a special rule about lease premiums

        a supply of water other than distilled water, deionised water or water of similar
         purity, or bottled water

        a supply of coal gas, water gas, producer gases or similar gases, or petroleum
         gases, or other gaseous hydrocarbons, in a gaseous state

        a supply of power, heat, refrigeration or ventilation




                                               4
ae73d712-3c3a-47a7-babc-857735fd262a.doc




        a supply of goods together with services in the course of the construction,
         alteration, demolition, repair or maintenance of a building or civil engineering
         work.

Supplementary charge invoice

The anti-forestalling legislation introduces a supplementary VAT charge of 2.5% which
becomes due on or after 1st January 2010. N.B.VAT will already have been due at 15%
on receipt of the earlier payment or the date of issue of the invoice. When the
supplementary charge becomes due, the supplier must issue a further VAT invoice to the
customer within 45 days of the charge becoming due. Invoices should be headed
“Supplementary charge invoice” and should contain the following details:-

        an identifying number and date of issue

        the amount of the supplementary charge

        the name, address and registration number of the supplier

        the name and address of the customer

        the identifying number and date of issue of the original VAT invoice.

N.B. The supplementary charge is input tax and can be recovered in the normal way.

Exceptions to a Supplementary Charge

Premium paid for a lease of land

The supplementary charge will not apply to a payment or VAT invoice for a premium
under a lease granted before 1 st January 2010, where the lease extends beyond that date.
In relation to the premium, the lease is treated as having been supplied on the date it is
granted, rather than when the lease ends.

Leasing of Assets

There is no supplementary charge on prepayment or advance invoicing of rentals or hire
charges for leasing of any assets, if the prepayment or VAT invoice is for a period of not
more than a year and is in accordance with normal commercial practice when no VAT
rate increase is expected.

Normal Commercial practice

In certain circumstances the supplementary charge will not apply to transactions that
would otherwise be affected if the supplier can demonstrate that the transactions are in



                                              5
ae73d712-3c3a-47a7-babc-857735fd262a.doc




accordance with normal commercial practice when no VAT rate increase is
expected.

Normal commercial practice within a particular business
i.e. where there is a continuing business relationship between supplier and customer

Any business that issues VAT invoices or receives pre-payments for

        goods or services in excess of £100,000 or
        covering a period of up to a year in respect of the leasing of assets

will not have to account for the supplementary charge if it can demonstrate that such
transactions form part of its normal commercial practice and were not entered into in
order to avoid the effect of the rate rise (and the transactions are not caught by the other
conditions which do not have a normal commercial practice exception – e.g. supplies to
connected parties).

Accordingly, where a business has a number of customers that have previously paid in
advance for goods or services, it will not have to account for the supplementary charge if
those customers pay before 1 st January 2010 for goods or services to be provided after
that date, and the periods covered by the advance payments are similar to previous
advance payments.

However, just because pre-payments ordinarily occur as part of normal commercial
activities, it is not in itself sufficient for all pre-payments to be considered as outside the
scope of the legislation. For example, if a long-standing business customer who normally
pays in arrears approached the business to accept a pre-payment in excess of £100,000
before 1st January 2010 for services to be provided on or after that date, then it would be
prudent for the supplier to check whether the customer can recover the VAT in full on the
supply. If that is not the case, the supplementary charge will apply. This is because the
transaction does not meet the normal commercial practice test in this instance and
the pre-payment is made expecting a VAT rate increase. Similarly it would not be
possible for a business to suggest that its partly exempt customers make such pre-
payments without the supplementary charge potentially applying.

In summary, any company that pre-invoices or receives pre-payments as part of its
normal business transactions will not be affected by the anti-forestalling legislation
unless it issues a VAT invoice to, or receives a pre-payment from a customer who does
not ordinarily pre-pay, and the consideration (including any related supplies) is in excess
of £100,000, or the transactions are caught by other conditions which do not have a
normal commercial practice exception.

Normal commercial practice within a business sector
i.e. where pre-payments may be the norm for a particular business sector but transactions
are more in the nature of a „one-off‟.




                                               6
ae73d712-3c3a-47a7-babc-857735fd262a.doc




For example, in the construction industry a one-off client might pre-pay before works
start so that the builder can purchase specialist parts or equipment. If the client cannot
recover all of the VAT charged, such a pre-payment would, on the face of it, be caught by
the legislation if it exceeded £100,000. However, provided the construction company can
show that the pre-payment was in accordance with the industry norms, Customs will
accept that it is normal commercial practice, even though the company may not have
dealt with that client previously and cannot point to previous examples of pre-payments
between them. Similarly a property development company may enter into an option to
purchase land from an individual landowner where the value of the option exceeds
£100,000 and where the land will be provided free or at a discount after 1 st January 2010.
It is not essential for the property company to have entered into similar transactions with
that same individual in order for this to be normal commercial practice. However, it will
need to point to similar transactions it has made in the past, or the fact that such
transactions are normal within the sector, to show that it was not carried out in order to
avoid the effect of the reversion of the standard rate to 17.5%.

HMRC has also recently advised the University in relation to the following transactions:-

    a.) The purchase of equipment valued in excess of £100k where final payment will
        be made before the end December‟09 but contrary to initial expectation, the
        equipment will not be delivered until January‟10 due to delays in the
        refurbishment of the laboratory in which the equipment will to be installed.
        Customs advise that we need to consider what is the normal practice for this type
        of purchase, whether we have used this company before and if so what were the
        arrangements previously? We should also consider what are the terms of the
        contract set by the supplier

    b.) Electronic journals valued in excess of £100k invoiced in advance of the
        subscription year. Again we need to consider whether this is normal commercial
        practice e.g. if in previous years we paid for the electronic journals in the
        December prior to the year‟s subscription; if so, then this years arrangements are
        not out of the ordinary and would be considered normal practice

    c.) The purchase of custom built equipment from a supplier based in another EU
        Member State valued in excess of £100k. Delivery is not expected until April‟10
        but in order to satisfy funding requirements, it was necessary to pay the supplier
        in full by a specific date early in December‟09. Customs advised that in
        considering whether this is normal commercial practice, you need to consider the
        reasons behind the payment arrangements e.g. if the conditions of using the
        funding for the purchase state that the payment must be made in December‟09
        then this would be an example of normal commercial practice.

N.B. Evidence that transactions are being made in line with normal commercial
practice must be retained for future inspection by HMRC

Further guidance on the anti-forestalling legislation is available on the HMRC website



                                             7
ae73d712-3c3a-47a7-babc-857735fd262a.doc




Treatment of Specific Transactions
1. Deposits or pre-payments

VAT should normally be accounted for at the rate in force when a deposit or pre-payment
is received. If you receive a deposit before 1 st January 2010 for goods or services that you
will supply on or after that date, the 15% rate of VAT will apply to the deposit and 17.5%
will apply to the balance, although the option exists for suppliers to charge 17.5% on the
deposit if it is easier for their accounting systems.

If payment is received in full before 1 st January 2010, VAT will be due at 15%.

N.B. Anti-forestalling legislation limits the extent to which the 15% rate can apply to
deposits or prepayments for certain supplies of goods or services provided on or after 1 st
January 2010. Although intended to prevent VAT avoidance, HMRC believes that in
practice, the legislation should affect very few businesses.

2. Issuing credit notes when using the special change of rate provisions

The special rules may be used where goods are provided or services performed before 1st
January 2010 but the invoice is raised or payment received after the rate change. For
example, if you issue a VAT invoice after 1 st January 2010 for goods provided or services
completed before 1st January 2010, you can, if you wish, apply the 15% rate. You can
decide to apply these rules even if you have already issued a VAT invoice showing
17.5% VAT but the VAT must be “corrected” within 45 days of the rate change i.e. by
14th February 2010.

3. Goods or services provided after 1 st January 2010

You can also opt to use the rules where a payment is received or an invoice raised before
1st January 2010 for goods or services that will be provided on or after that date. Under
the normal rules VAT should be accounted for at 15%. However, under the special rules
you may account for VAT at 17.5% on the payment or amount invoiced before 1 st
January 2010.

N.B. Anti-forestalling legislation limits the extent to which the 15% rate can apply to
deposits or prepayments for certain supplies of goods or services provided on or after 1 st
January 2010.

4. Supplies that are in progress on 1 st January 2010

The normal rule is that where an invoice is issued or a payment received after 1 st January
2010, VAT is due at 17.5% even if part of the supply was undertaken before that date.
However, the special rules apply in relation to continuous supplies of services e.g. lease



                                              8
ae73d712-3c3a-47a7-babc-857735fd262a.doc




of a photocopier and to single supplies of services carried out over a period of time e.g. a
consultancy report which may take a number of months to complete.

Continuous supplies, whether of goods e.g. gas or electricity, or services e.g. equipment
hire, which are normally invoiced applying the tax point rules, VAT may be accounted
for at the 15% rate on that part of the supply made before 1 st January 2010 i.e. on the
value of goods actually supplied or services actually performed before 1 st January 2010;
VAT will be due at 17.5% on the value of the goods actually supplied or services actually
performed on or after that date.

Example

Q. Equipment is leased at £100 per month plus VAT and is normally invoiced quarterly
in arrears. What VAT should be charged for the quarter covering 1 st November 2009 to
31st January 2010?

A. The normal rule is that the entire £300 fee is liable to VAT at 17.5% because the
invoice is issued after 1 st January 2010. However, by using the special rules, VAT may be
charged at 15% on the payment for November and December 2009 which produces a
VAT saving to any customer who cannot recover all the VAT incurred.

Single supplies carried out over a period of time. A single supply of a service may be
carried out over a period which commences before 1 st January 2010 but is not completed
until after that date e.g. decorating a building. Unless a payment has been received or a
VAT invoice issued before 1st January, the whole supply should be charged at the 17.5%
rate under the normal rules. However, by using the special rules, VAT may be charged at
15% on the work done up to 31 st December 2009 and 17.5% on the remainder.
N.B. Suppliers will need to be able to demonstrate that the apportionment between the
two amounts accurately reflects the work done in each period e.g. by daily/hourly rate.

5. Refunds

If you give a refund or issue a credit note for a sale made before 1 st January 2010, then
the rate of VAT refunded should be the one which was in force at the time of the original
supply e.g. if the sale was in November‟09 the rate will be 15%. The VAT fraction to be
applied to VAT inclusive cash amounts in order to calculate VAT due at 15% is 3/23; for
VAT due at 17.5% it is 7/47.

6. Invoices with annual VAT Schedules

Suppliers must produce replacement schedules for periods after 1st January 2010 which
show the VAT due at the standard rate of 17.5%.

7. Subscriptions to Clubs and Associations

The tax point for membership subscriptions is normally at the start of the membership


                                             9
ae73d712-3c3a-47a7-babc-857735fd262a.doc




year when a VAT invoice is issued or the subscription is received, whichever happens
first. There is no requirement to adjust any VAT which has previously been accounted for
at 15% on subscriptions renewed before 1st January 2010, even if the membership year
extends into 2010. However, if membership fees are invoiced or paid in arrears by
instalments and a tax point occurs after 1 st January 2010 covering an instalment period
that spans that date, then that element of the membership fee can be apportioned i.e. VAT
may be accounted for at 15% on the value of the services actually performed before 1 st
January 2010 with VAT at 17.5% being applied to the value of services actually
performed on or after that date.

8. Construction Services

Stage Payments - Where supplies (including design, advisory and supervisory services)
are made under a construction contract which involves the customer making stage
payments, the tax point will normally be the time a VAT invoice is issued or a payment
received, whichever happens first.

Work completed before 1 st January 2010

Under the normal rules, VAT invoices issued and payments received on or after 1 st

January 2010 will be liable at 17.5%. This includes retention or final account payments.
However, if they relate to work completed before 1 st January 2010 the special change of
rate rules can be used to apply the 15% rate.

Work in progress on 1 st January 2010

If a supplier continues to carry out work under a stage payment contract on 1st January
2010, any VAT invoices issued or payments received on or after that date will be liable to
VAT at 17.5%.

However, the special change of rate rules can be applied if a VAT invoice is issued or a
payment received (including retention or final account payments) which covers work
actually performed up to 31 st December 2009. Where necessary the amount involved
should be apportioned (based on measurable work or normal costing or pricing
structures) and VAT calculated at 15% on the element of the work performed before 1st
January 2010.

N.B. Suppliers must be able to demonstrate that the calculation is fair and reasonable.

Other (single payment) construction contracts

Where a customer makes only a single payment (excluding any agreed retention),
perhaps when the work has been completed or is nearing completion, the supply is liable
to the normal tax point rules including a final (basic) tax point when the work is
completed.


                                            10
ae73d712-3c3a-47a7-babc-857735fd262a.doc




Work completed before 1 st January 2010

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

Work in progress on 1 st January 2010

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

If a supplier raises a VAT invoice or receives payment on or after 1st January 2010 for
work that was in progress while the 15% rate applied, he can apportion the amount
involved (based on measurable work or normal costing or pricing structures) and
recalculate the VAT at 15% on the element of the work performed before 1 st January
2010; again the supplier will have to be able to demonstrate that the calculation is fair and
reasonable.

Anti-forestalling legislation may also need to be considered, particularly where supplies
concern connected persons or involve advance payments in excess of £100,000 (see
above).

9. Property

Leasehold

The tax point for standard rated property rentals is the date a VAT invoice is issued or
payment received, whichever happens first. The special change of rate rules may be
applied where rentals are invoiced or paid in arrears i.e. if a VAT invoice is issued or a
payment received after 1st January 2010 for rental periods that span 1st January, the rent
involved can be apportioned and VAT declared at 15% on the part that applies to the
period to 31st December 2009. These same rules can be applied to a VAT invoice issued
after 1st January 2010 for a premium in respect of a lease granted on or before 31 st
December 2009.

Freehold

The basic tax point for a freehold sale is the date of the completion of the conveyance. An
earlier tax point is created where (for a standard rated supply) a VAT invoice is issued
beforehand or part or all of the purchase price is received before completion. The special
change of rate rules will only be appropriate in cases where a VAT invoice is issued on,
or after, 1st January 2010 which creates a tax point for a property on which completion
took place before that date.




                                             11
ae73d712-3c3a-47a7-babc-857735fd262a.doc




10. Coin operated machines

Special arrangements apply to supplies made through coin operated machines, such as
vending, amusement and gaming machines. This means that normally the accounting for
VAT can be delayed until the takings are removed from the machine.

However, at the time of a change in VAT rate, suppliers are required to revert to the
normal rules and account for VAT based on the date the machine is used. If the
machine does not record this information any takings spanning 1 st January 2010 will need
to be apportioned based on typical usage. The 15% VAT rate can then be applied to the
sales up to 31st December 2009 and 17.5% to sales made on or after 1st January 2010.


11. Sales of tickets to events (incl. season tickets)

HMRC views the sale of tickets to a concert or theatrical performance as being the sale of
the right to attend a particular event.

If a ticket is sold before 1st January 2010, VAT of 15% is due even if the event does not
take place until on or after that date.

The same principle applies to season tickets. If these are bought and paid for prior to 1 st
January 2010 they are subject to 15% VAT even though the majority of performances
may take place after the standard rate reverts to 17.5%.




JMH/10.12.09



                                             12

				
DOCUMENT INFO
Shared By:
Categories:
Stats:
views:10
posted:6/2/2010
language:English
pages:12