VAT on the rise, HMRC on the ball
HMRC has acted swiftly to forestall any manipulation of transactions that aims to avoid the forthcoming increase in VAT.
The increase from 17.5% to 20%, announced in the June Budget to no great surprise, will affect any standard rated supply made on or after 4 January 2011, and any acquisition or importation taking place from that date. In order to target transactions which are artificially structured to apply the 17.5% rate of VAT instead of 20%, HMRC has introduced VAT 'anti-forestalling' legislation aimed at businesses in the insurance and financial services sectors, and any other partially exempt businesses/organisations such as charities and funded bodies.
Supplementary charging
HMRC's new VAT legislation will apply where the customer cannot recover all of the VAT on the supply and one or more of the following conditions are met:
- the supplier and customer are connected
- the supplier or connected party finances the prepayment by the customer
- the invoice is raised but full payment is not due within six months of the invoice date
- the value of the supply (and any related supplies) is more than £100,000 and it is not "normal commercial practice" to pre-invoice or receive prepayments for supplies made.
When these conditions exist a supplementary charge of 2.5% to VAT payable by the supplier will apply to transactions entered into on or after 22 June 2010 and, where applicable, will become due on 4 January 2011 and must be accounted for on the VAT return covering that period.
Other implications
- The legislation includes provisions to prevent the use of the grant of standard-rated rights or similar options as a VAT avoidance mechanism.
- Changes to the thresholds for the 'Payment on Account' and 'Flat Rate' schemes have also been made to maintain the status quo of these schemes.
If you need further advice, please contact Littlejohn VAT Partner Bob Jones on 020 7516 2295 or email rjones@littlejohnllp.com
